The main currency pair has dropped to the lowest level since early June. In total, since the high, which was set a month ago, the rate has already dropped over 230 pips. The recent depreciation of the euro seems to be supported by speculation about the decisions of the European Central Bank, which may be taken already this Thursday.
Euro decline along with the waiting for the decision of the central bank is accompanied by an increase in the expected volatility observed on the FX options market. In this way, investors can hedge against major changes in the Forex market as a result of more surprising events. On Tuesday, the expected volatility for EUR/USD weekly options increased to the highest level since the end of June. So it is worth paying attention to the Thursday decision of the ECB and Mario Draghi's press conference.
Market consensus assumes that at the meeting this week the ECB will not decide to change monetary policy and will not cut interest rates. Such a scenario is valued by the market at only 38 percent. However, already the central bank will announce such a possibility in the nearest future, in order to maintain proper communication with investors. Therefore, it seems that the September will be the most probable month of the deposit rate reduction by 10 basis points from -0.4 to -0.5 percent. Nevertheless, there have been rumors on the market that the easing of the ECB's monetary policy may take place this Thursday, which was to exert pressure on the euro.
It seems that it is only a matter of time when the cost of money will fall to the delight of stock market bulls and borrowers, because inflation in the euro area remains below the target, and expectations as to the level of prices in the long term are at 1.3 percent. In addition, the ongoing trade war affects the economic slowdown, which may even lead to the easing of monetary policy. However,only cutting rates may not be enough and more and more is being said about the resumption of the asset purchase program. Last month, according to estimates by Reuters, the chances for QE 2.0 were at 15 percent. This month they reach 40 percent.
It seems that the ECB, unlike the Fed, did not even manage to raise interest rates, and it will have to lower them in order to support the economy and inflation. The only question is whether it is effective, because now the financial institutions are tightening the terms of granting loans, because they are afraid that the borrowers will have problems with repayment due to the coming downturn. The euro area has no problem with cheap money, but it seems to have a problem with the purpose of borrowing it and the prospects of borrowers, and it is not dependent on the central bank.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
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