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Euro on the Defensive Ahead of ECB Rate Decision

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Euro on the Defensive Ahead of ECB Rate Decision

The euro’s early-week rally was short-lived, as speculation about another rate cut from the European Central Bank shifted market sentiment.

The euro was trading defensively versus the US dollar and British pound. The EURUSD pair eased off yesterday’s close of 1.3527, falling 14 pips to 1.3513. The pair traded within a narrow range as the forex markets shifted their attention to the ECB. Meanwhile, the EURGBP fell 14 pips to 0.8282 after surpassing the 83.00 handle briefly in the European session. The EURGBP has performed reasonably well over the past five sessions, having gained more than 0.4 percent.

Europe’s common currency enjoyed broad support Monday after Eurozone manufacturing PMI exceeded forecasts. Markit Group’s gauge of Eurozone manufacturing activity rose to a 32-month high, led by deepening recovery in Germany and broad improvements in peripheral nations. Markit Group will produce data on Eurozone services Wednesday.

The ECB is scheduled to deliver its rate decision Thursday. Policymakers suffered fresh headaches after Eurozone inflation eased to 0.7 percent in December. Although the ECB has repeatedly stated deflation poses no serious risk, central bank President Mario Draghi maintains the ECB will use every tool in its arsenal to make sure deflation does not become reality.

The ECB’s benchmark rate is currently pegged at 0.25 percent. Although no changes are expected, some market voices believe the ECB may need to ease policy further in the near-term to bring inflation closer to the 2 percent target. This could mean slashing the benchmark rate to 0.1 percent and setting a small negative deposit rate.

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