Tomorrow afternoon, the European Central Bank President, Mr. Mario Draghi will address the world’s assembled media. The press conference will take place following the ECB’s announcement of the Minimum Bid Rate.
The European Central Bank currently benchmark rate currently stands at a record low of 0.05%, which is a level that it has remained at since September 2014.
The ECB is expected by many to expand its Quantitative Easing programme this Thursday. Although much of the impact of such an announcement is already priced into the market, if such an initiative was to be taken by the ECB would still have ramifications for market participants.
Aside from the admission that the current policies taken thus far by the ECB have been ineffective in introducing inflation and growth into the Euroarea economy, the question of how one plays an expansion of the current extremely large QE program is far from simple.
So how does one trade and manage the events of Thursday and beyond?
In anticipation of an expansion of the current ECB QE programme and with the United States Federal Reserve on course to increase interest rates later in the month, market participants have positioned themselves to the short side of the EUR/USD trade. This has led to the euro experiencing a structural downtrend for a considerable time, with EUR/USD seemingly in freefall and heading towards parity at the 1.0000 level.
The euro has suffered badly against the British pound too. As the Bank of England is moving towards a path to tightening the United Kingdom’s monetary policy, the likelihood of EUR/GBP testing prior lows should not be discounted.
Once again this morning, EUR/GBP is testing the 0.7000 area. If support is broken, seeing EUR/GBP test the 0.6500 and 0.6000 over the next few months should not be ruled out.
The only glimpse of brightness on the horizon for the EUR/GBP story is the uncertainty created over the planned referendum on Great Britain’s continued membership of the European Union.
Although it is expected that the British public will vote in favour of the UK remaining within the European Union, the risk of a surprise could rattle the markets and place downward pressure on the British pound.
Back to EUR/USD, the case of just simply shorting this pair down to the 1.000 level is far from straightforward. The market is positioned heavily to the short side of this trade and with EUR/USD now approaching some strong support that was formed in March, the potential for a strong bounce following the ECB press conference would not be a great surprise.
As history tells us repeatedly, the herd is usually wrong and although following such a strong down trend would seem the sensible cause of action. However, when the market is so overweight in one direction, the best course to take in many cases is to the contrarian side of the trade.