The European Central Bank (ECB) held its benchmark interest rate at the historic low of 0.05%. It is also preparing investors for its QE, bond purchase program – the Public Sector Purchase Program (PSPP). This will start next week, and will amount to 60billion euros ($66billion) a month. ECB president, Mario Draghi expressed optimism for this programs ability to stem deflationary threat. He also noted that “risk surrounding the economic outlook for the euro area remain on the downside” but, they “have diminished following recent monetary policy decisions.” The QE program looks like its going to be run as planned and this should continue pressure the euro, especially against the greenback, because the FOMC is on pace to raise rates this year.
The diverging central bank directions have already dragged the EUR/USD below 1.11 this week, which was the low on the year since the end of January. After the ECB statement, the EUR/USD jolted up briefly, but found resistance at the 1.11 handle and slid to 1.10 by the end of the session. The parity level is now very much in sight. We might see some pullback as the short-term technicals seem oversold, but as long as price holds below 1.1150, the downside remains towards parity and possibly lower.
The Bank of England is in a holding position. Although there was a unanimous vote to hold the benchmark rate at 0.50%, there was a split on the direction of monetary policy over the next year. Some MPC members believe a rate hike is due at the end of the year, while others believe that loosening policy is appropriate.
Compared to EUR/USD, the GBP/USD will have more resilience because there are elements within the central bank who are looking for tightening policy. That means, the bottom for cable could be coming up soon. Today, the reaction was eventually bearish, but the pound-dollar found support at 1.52. Now, if price rebounds and still remains under 1.54, there is still downside risk towards the 1.4950-1.50 lows on the year. However, a break above 1.54 could be a sign of further bullish correction, which would put pressure on the 1.5550 high, with risk of extending to 1.56.
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