The European Central Bank’s monetary policy decision is scheduled for tomorrow, along with the ECB press conference. Up until now the ECB has resisted calls to start the process of tightening its policy. But there has been speculation that the Bank’s President Mario Draghi will start preparing the market about the prospects of tapering its massive QE stimulus programme earlier than expected. There are two reasons for that: (1) noticeable improvement in Eurozone data and (2) pressure from Germany, where several officials including Chancellor Angela Merkel have recently called for tighter ECB monetary conditions. But earlier today, Bloomberg reported that the central bank will cut its inflation forecast through 2019. This immediately gave rise to speculation that the ECB may not, in fact, hint at the prospects of early tapering of QE at this particular meeting. The euro dropped 50 pips in the immediate aftermath of the news. However, just because it will reduce its inflation forecasts it doesn’t mean the ECB will avoid the topic of tapering QE. So it is a bit premature to assume anything at this stage, just a day before the meeting. As a result, the euro may be able to regain its poise and wait for clear direction from the ECB itself, rather than from market chatter. As for as European stocks are concerned, a dovish ECB should lead to a pop in the major indices, while a hawkish central bank may cause a sell-off.
The other event happening tomorrow will be the small matter of the general elections in the UK. So as well as the euro, the pound will be under the spotlight too. Recently, opinion polls have shown that the lead for UK Prime Minister Theresa May’s Conservative Party has diminished over the Labour Party. This has raised uncertainty about the outcome of the elections. Are we going to have a hung parliament? That’s key question. Up until recently a Conservative victory was a forgone conclusion. But with the Labour leader Jeremy Corbyn coming across very well in the campaigns, no one is quite sure any more about the outcome of the elections. Still, a victory for Theresa May remains the most likely scenario, though her party may not secure as many seats as it would have liked. This outcome may be positive for the pound and the FTSE as Conservatives are more business-friendly. However Brexit negotiations may become more complicated if we are left with a hung parliament and thus a coalition government. This outcome may be bad for both the pound and the FTSE.
Where will all this leave the EUR/GBP currency pair? While no one could possibly answer that question with a high degree of certainty, there are some interesting levels to watch around which we may get a few bounces, and thus trading opportunities. Understandably the Chunnel is currently range-bound but above the moving averages and nearer the top of the range. Thus the bulls have the technical edge heading into Super Thursday and beyond. But thing could change very quickly, especially around 0.8860/85 if we get there. This area was the last untested broken support. A potential re-test of this level could see the unit retreat sharply as old support turns into resistance. On the downside, the key support levels to watch include 0.8615, 0.8530 and above all 0.8315, the latter being the base of the current wide range.