The euro drifted lower ahead of the crucial ECB meeting later today as traders awaited further monetary policy accommodation moves from Mario Draghi and company.
The single currency dipped to low of 1.0960 in morning European dealing as markets anticipated that the ECB would cut deposit rates further by perhaps another 10 basis points to -0.4%. The open question however is whether European policy makers will add to QE measures perhaps expanding the program to stimulate further credit and economic growth.
The data from the region has been moribund, albeit still slightly expansionary. However, Germany which the true engine of economic growth in the region, has seen its number deteriorate since the start of the year. Today’s German Trade Balance report which printed at 13.6B versus 17B eyed is only the latest sign that the vaunted German export machine is starting to sputter.
Exports were down -0.5% versus 0.8% expected but the blow was softened by upward revisions of prior month’s data which saw exports improve -0.7% from -1.6% initially stated. Still the overall trend in export data is clearly down as Germany faces a struggling Middle East market and a slowdown in China. So the question for today’s presser will be whether the German monetary officials which are notoriously hawkish will turn more accommodative and will allow Mr. Draghi to expand the QE experiment.
Yesterday’s surprise rate cut by the RBNZ shows that monetary policy makers clearly remain concerned about the slowdown in global demand and the market will see if Mr. Draghi chooses to be more pro-active in tackling this issue. Any further sign of accommodation will likely take the pair down to the 1.0900 level but for now the pair enjoys strong support in the 1.0800 region and we doubt that the ECB actions will be so dramatic as to warrant a steeper move lower.
If on the other hand Mr. Draghi chooses to remain still for now, the EUR/USD could see a short covering bounce perhaps towards the 1.1100 mark but given the deteriorating conditions in the Eurozone and rally will be simply a better place for short to establish their positions.