ECB disappointment could see EUR/USD move higher

Eurozone unemployment levels are hitting new records whilst inflation is softening and with much of the continent mired in an economic depression hopes are running high that the European Central Bank (ECB) will cut interest rates. Even if it did, it would only be a symbolic gesture, but one that forex markets would pay close attention to. 

A 25 basis point rate cut on its key refinancing rate to 0.5% from the ECB would have a minimal impact on the real economy, though it would make headlines given it would be the first reduction since July 2011. More importantly for the forex markets, it might signal that a more aggressive monetary stance is in the cards.

What will probably matter more than whether rates are cut or not is what ECB President Mario Draghi says at the press conference on Thursday morning in Europe. He may well seek to address market chatter about more aggressive monetary policy, but may not say what many market participants are clearly hoping for. So it could be rate cut combined with words to curb any enthusiasm on more imaginative forms of monetary policy.

Crucially the Consumer Price Inflation index in the Eurozone was 1.2% in April, the lowest in more than two years and is well below the ECB's 2% target. So there seems little reason to hold back on a rate cut or two even to contemplate more aggressive monetary policy, at least in the opinions of many market participants.

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