Trading the ECB Rate Decision

With speculation heightened over a potential interest rate cut in the near term, there is a lot of attention being placed on tomorrow’s ECB rate decision. And, although there is plenty of economic data to support such a move, there is always the chance that things could play out differently. Here’s what to expect.

To Raise or Not To Raise

This question has emerged and lingered for the last couple of months as the Eurozone struggles with slowing manufacturing activity and slumping employment. For the record, manufacturing in the region has remained mired in contraction for the past year and a half, declining to an annualized low reading of 44.1 according to Markit data.

Employment has done even worse, dipping to the lowest on record since the inception of the single currency. According to the most recent data, unemployment in the EZ rose to 11.8% in November, or equivalent to almost 19 million jobless individuals.

With economic data in the pits, the European Central Bank will likely have to consider cutting rates by at least one time for 25 basis points in 2013. The notion is supported on the fact that policymakers lowered growth forecasts for 2013, pitting contraction to continue to the tune of a 0.3% annualized decline. Last year’s growth rates are expected to show a 0.5% contraction in the Euro-area economy.

What To Expect

Interest Rate Cut of 25 Basis Points. A bearish scenario for the Euro, an interest rate cut at this point will have been based on the fact that the Euro-area economy is expected to remain in a slump this year, and assistance is needed to initiate a recovery. Subsequently, the rate reduction serves as a reminder of European economic weakness that is anticipated to remain prolonged.

No Change. The most likely scenario, a no rate change decision by the ECB would keep Euro bullishness supported in the near term and shift focus to potential rate cuts later on in the year. With inflationary pressures still remaining above 2% - currently at 2.2% - and policymakers reluctant to act without any indications from the recently implemented OMT measure (Outright Monetary Transactions), it remains highly unlikely that central bankers will vote for a rate change at this point in time.

Expect the 1.3000 round figure to act as a catalyst to an advance towards 1.3200 if this happens.