ECB Causing Jitters in Euro Market

Euro traders all seem to be in agreement that the European Central Bank will cut its benchmark interest rate to 1.0%.  The question is will the ECB announce a plan to buy back assets, and if it does, will it implement the plan or wait and see like the Bank of Canada?

The Euro was under pressure all day as traders were reluctant to hold on to long positions ahead of this week’s central bank meeting. Much of the selling pressure was related to concerns over the Euro Zone economy and the upcoming actions by the European Central Bank later this week.

On May 7th 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. This uncertainty is leading to selling pressure on the Euro this morning.

The ECB may pull some tricks following the meeting very similar to what the Bank of Canada did several weeks ago when it decided to refrain from applying any quantitative easing to its economy. At this time EUR USD traders are pricing in a rate cut and quantitative easing. After the interest rate announcement the ECB may announce a plan to buyback assets but there is no one to force them to apply it right away. Remember it has a consistent record of being behind the curve.