ECB Leaves Key Interest Rate at 0.0%, Forward Guidance Unchanged

Daily EURUSD

Daily EURUSD

It remains to be seen whether ECB President Mario Draghi will signal measures towards winding down the bank's quantitative easing program at some point this autumn. The euro rallied past 1.20 against the United States dollar in August and hit 0.93 against the pound.

As a self-imposed deadline at the end of December approaches, two major factors are squeezing the European Central Bank: a stronger euro and still-sluggish inflation could justify prolonging QE, but it is approaching the legal limits of the scheme and may be forced to wind it down. For now, it seems hard to see any means by which the ECB can arrest the euro's rise, as at some point the bank will want to cut back the monthly asset purchase programme further.

The ECB has raised its growth forecast for 2017 and 2018, but cut its inflation forecast for 2018 and 2019.

If Mr Draghi and his colleagues were to bring their asset purchases to a premature end, let alone raise interest rates, it would simply send the euro higher still and make their job even harder.

The head of Deutsche Bank, Europe's biggest lender, had on Wednesday called on the ECB to change course on providing cheap money, despite the strong euro, warning he sees price bubbles in stocks, bonds and property.

While the latest consensus is for the euro to trade around current levels, that outlook is not very different from analysts' predictions for the euro to weaken slightly or remain stable since the beginning of the year.

Failure to test the 1.2130 (50% retracement) hurdle may spur a larger pullback in EUR/USD, with a move below the 1.1770 (100% expansion) region opening up the 1.1670 (50% retracement) support zone, which largely lines up with the August-low (1.1662).

Canada's dollar held its gains after a surprise interest rate rise on Wednesday reminded everyone that G7 monetary settings would not remain super-easy forever.

Will the European Central Bank announce QE tapering?

-Sign Up & Join DailyFX Market Analyst Martin Essex LIVE to Cover the ECB Meeting. The 1.20 could be an interesting top for tactical sales and pressure the EURUSD toward 1.1715 and 1.1495, the minor 23.6% and the major 38.2% retracement on April - September rise respectively.

Markets are waiting to hear remarks by ECB President Mario Draghi about the expected phase-out of the bond-purchase stimulus next year as the economy improves. This could help Draghi to contain the European Central Bank hawks' enthusiasm as much as possible. Traders should be prepared for two-sided volatility on Thursday.

The euro had been on the up in the hours prior to the ECB's decision and press conference, and jumped to a one-week high of $1.2059 when Draghi didn't appear to show particular alarm over the surging currency. Risks to the Euro around this meeting are skewed to the downside in our view.

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