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Forex Flash: What will be the next move by the ECB?

FXstreet.com (Barcelona) - In light of the ECB monetary policy meeting this afternoon, the majority of analysts expect the central bank to hold the lending benchmark at 0.75%. However, the likeliness of a rate cut has grown bigger more recently, as the situation in the euro area remains fragile. Moving forward to Draghi’s presser, the handling of recent developments in Cyprus will be in the spotlight.

So, favouring an ‘on hold’ stance by the ECB, we can align:

Derek Halpenny, Strategist at BTMU argues, “We still expect the ECB to cut but today is premature and today could be more about Draghi reassuring the markets that progress is being made… We maintain that an ECB rate cut will come over the summer months, possibly in June”

Camilla Sutton, Chief Strategist at Scotiabank, suggests “We expect the ECB to hold rates at 0.75% and that President Draghi sounds vaguely more dovish than his previous press conference (particularly considering weak PMIs and a new record high in the 12% unemployment rate).

In addition, analysts Richard Barnwell and Xinying Chen at RBS remark “We do not think that the Governing Council will cut the main refinancing rate this week. Looking a little further ahead a rate cut becomes more possible at the June meeting. But in order for that to happen, we would need to see sufficient bad news on the macroeconomic front”.

“Our European economists expect no change in the policy stance from the ECB though they do acknowledge that the risk of a refi rate cut has risen. Draghi’s post-ECB press conference may be of more interest where our economists expect a tough line of questioning around the ECB’s handling of the Cypriot crisis”, writes Jim Reid, Analyst at Deutsche Bank.

Emile Cardon, Strategist at Rabobank comments, “Looking at the turmoil the recent Cypriot crisis ‘resolution’ has caused, a rate cut by the ECB at this point would smack of uncertainty if not outright panic among the Governing Council. What’s more, in the previous meeting ECB President Draghi expressed a great deal of confidence in the current policy strategy, which, he believes, should ultimately pay off”.

However, a rate cut maybe in the pipeline according to Analyst Christin Tuxen at Danske Bank: “ECB in focus and a refi-rate cut would clearly be EUR negative to the extent it leads to a flatter EURIBOR curve; we expect that a 25bp cut would lead EUR/USD to break below the 1.27 level that prevailed prior to the OMT announcement”.

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