EUR/USD to remain weak ahead of ECB interest rate decision – Danske Bank

The EUR/USD will remain being weak ahead of the ECB interest rate decision, according to Danske Bank.

ECB interest rate decision preview

The ECB will be third major central bank to make an interest rate decision this week after the BOJ and the Fed. The bank will start its monetary policy meeting on Wednesday and release its rates decision on Thursday.

Most analysts polled by Bloomberg expect the ECB to leave interest rates intact at the current minus 0.5%. Also, most analysts expect the bank to commit to do more to support the bloc’s economy during this pandemic. A smaller number of analysts expect the bank to boost its pandemic purchase program (PPEP) from the previous €750 billion to about €1.5 trillion.

In a report released on Friday, analysts at Danske Bank said that they expect the bank to take a cautionary approach. In this, the bank expects the ECB to acknowledge the severity of the pandemic and commit to do more to ease. The report said:

“Therefore, we expect the ECB to reiterate its commitment to stand ready to increase and extend the purchase programme and stand ready to act should more be needed.”

Europe economy under pressure

The ECB decision comes at a time when Europe’s economy is under pressure. Last week, manufacturing and services PMI data released by Markit showed that business activity has collapsed. The manufacturing PMI declined to a record low of 33.6 in March while the services PMI dropped to a low of 11.6.

The unemployment rate in the region is expected to rise while more companies are expected to go out of business. At the same time, countries like Italy and Spain, are expected to go through more fiscal challenges in the near term. While Italy avoided a debt downgrade on Friday, the economy remains strained, with its vital tourism sector bleeding.

In a statement last week, ECB president, Christine Lagarde, said that the bank expected the EU economy to shrink by 15% this year. The economy shrank by just 8% in the 2008/9 financial crisis.

In another forecast, Fitch Ratings predicted that the eurozone economy would shrink by 4.2% this year. Brian Coulton said:

“The forecast fall in global GDP for the year as a whole is on a par with the global financial crisis but the immediate hit to activity and jobs in the first half of this year will be worse”

EUR/USD reacts to governments interventions

The decision by ECB this week will come a week after members disagreed on the best approach to fund the region’s recovery. On the one hand, countries like France, Italy, and Spain have advocated for the most-affected countries to be given grants.

On the other hand, Germany, Netherlands, and Austria have insisted that countries should pay a low interest rate on the funds. According to analysts, these disagreements could lead to another debt crisis in Europe in the near term.

Meanwhile, the ECB too has been working hard to cushion the region from the current pandemic. In March, the bank expanded its quantitative easing by pledging to buy more than €750 billion in assets. This has led to a sharp rise in the ECB balance sheet as shown below.

Just last week, the bank expanded its support by pledging to buy risky corporate bonds. These are bonds issued by big European companies that have received a lower credit rating by agencies like Moody’s and Fitch. Analysts expect that debt worth more than €65 billion could be downgraded in the near term.

EUR/USD forecast

The EUR/USD pair has already declined by more than 3% this year. The pair could drop more as the European economy continue to hang on a thread. In the report by Danske, the analysts said:

“That said, EUR/USD is now trading on the low side of recent ranges and one may be cautiously hopeful that the negative risk premium does not build further near term. However, it goes without saying that we continue to hold reservations as to the sustainability of EUR/USD upticks.”

On the four-hour chart, the EUR/USD pair has remained stuck around the 23.6% Fibonacci retracement level. It has also been forming a descending triangle pattern and is below the 50-day and 100-day exponential moving average. In the short term, the pair could move up and retest the upper resistance line at around 1.0875. The pair could also move lower this week after the FOMC and ECB decisions.