An interest rate cut by the European Central Bank should not surprise traders tomorrow but a quantitative easing plan that is not implement immediately could trigger a rally.
The EUR USD traded in a tight two-sided range today. Much of the selling pressure was related to concerns over the Euro Zone economy and the upcoming actions by the European Central Bank tomorrow.
Other traders were seeking safety in the lower yielding Dollar because of growing concerns regarding the U.S. banking system. News that the S&P Corp. cut the ratings on five German banks fueled additional pressure on the Euro. This may have been related to the banks’ exposure to Central and Eastern European toxic debt.
Tomorrow the European Central Bank meets to decide the future direction of interest rates for the European Union. With the European Union just this week-end issuing a forecast of a severe decline in the economy, there is no question the ECB will slash rates to 1.0%.
The difficult part is figuring out if the ECB is going to implement an asset buyback program. Even if you guess right, you still have to get the amount and the duration of the plan correct. Another item bothering traders is the possibility the ECB will announce a plan but choose not to implement it immediately.
This is what the Bank of Canada did two weeks ago, fueling the current rally in the Canadian Dollar. The mounting uncertainty triggered much of the selling pressure on the Euro on Wednesday.