The EUR/USD retreats slightly; next week’s ECB meeting will be important

The EUR/USD experienced a tremendous rally following the Treasury’s plan to spend over a trillion dollars in long-term Treasury debt, mortgage backed securities, and other debt. The currency pair spiked approximately 700 pips, a tremendous move. The question posed was whether the move would be sustained. Quantitative easing does not tend to be as effective as directly lowering interest rates, however, the currency pair remained near 1.37 for a few days. The stock market rally and rising oil prices could have helped that level be sustained. Now, we are seeing the EUR/USD finally retreat. Now the Federal Reserve has to rely on additional quantitative easing and additional stimulus measures in order to boost the economy. There will likely be a “wait and see” period to see the effectiveness of this measures and whether conditions improve in the credit markets and financial markets stabilize. The big question mark returns to the Euro Zone. Some analysts are starting to anticipate another rate cut next week. It is unlike for the ECB to announce quantitative easing measures and for this reason some analysts could be considering a steep rate cut. An IFO economist even believes that the ECB should lower rates by 100bp in the next meeting. This would surely be aggressive by ECB measures and the surprise could be a healthy boost for the markets. The EUR/USD will likely experience selling pressure until that meeting takes place. I suspect a move towards 1.30-1.31 where it will find heavy support.