The European Central Bank is going to hold a meeting about the continuation of European monetary policy this upcoming Thursday, but what can we expect? I'm not only asking this question regarding some personal holdings in European stocks, but also because I have some FX plays in mind. The EUR/USD pair is incredibly low at this point, and like many traders holding this pair, including myself, I wonder how low it can go. A big factor is this upcoming ECB meeting. Andrew Bosomworth of PIMCO wrote in a sneak preview that the economic problem in the EU stems from the fact that the inflation is far too low, and that it has been too low for years. The prediction of the ECB that we will reach an inflation point of 1.7% is simply not feasible, and that they're more leaning towards 1.3%. This specialist believes that significant steps necessary to increase those inflation expectations, otherwise there'll be likely a scenario as we see today in Japan. He emphasizes that it's the reason why extra stimulation packages are needed to boost the economy in Europe. That's because market players are more likely to adjust their inflation expectations when there are big changes in the market.
More effective
It's probably more effective to take significant monetary measures instead of gradual steps. PIMCO believes that the monthly purchase sum will be increased with an amount of 10 billion to 70 billion per month, and that the program will continue until at least March 2017. The refinancing interest rate will be lowered to 0% with 5 base points, and the deposit interest with 10 base points to -0.3%. Something has to be done and something is going to happen, doing nothing is not an option since no one wants a Japanese scenario. Bosomworth warns that there are risks involved if there's going to be more stimulation, like it could lead to financial instability. The stock markets are certainly going to be affected by it, although they are already by the ECB.
How will the euro be affected?
If indeed this scenario plays out I'm almost certain that the EUR/USD is going to drop even further. But we're there yet. In the short term I see the euro gaining strength before it will collapse to 1.04 or 1.03 even. Right now I'm long EUR/USD from 1.0591 with 1.0630 in mind, this is because I see some resistance, but midweek to Friday I'm looking for a good entry point to go short. Whatever the case may be, it's going to be a volatile week for the euro.