In its last meeting, the European Central Bank (ECB) maintained the status quo and kept its rates at 0.00%, 0.25% and -0.40% for rates on the refinancing facility, marginal lending facility and deposit facility.
The bank also reaffirmed that its asset purchase program of 80 billion euros ($87.03 billion) will continue until March 2017, and these are all factors that could weigh on currency pairs like the euro/dollar. Investors should be watching pairs like this in determining the next major trends that favor forex options strategies – not only in the euro/dollar but also in peripheral pairs like the euro/yen and the euro/Swiss franc as well.
Another important factor that is showing a bright spot in the eurozone is the Business Confidence Index, which came in at 0.45 – the highest figure for the past five years. This was the highest reading since October 2014, and it was due to increasing service prices and a slower decline in food and energy prices. But while this does look encouraging it should be remembered that this reading is far from the ECB’s target inflation rate of 2%. This means the ECB will stay on the sidelines in terms of interest rate strategies.
Chart view: EU Business Confidence
The businesses' expectations figures have risen sharply in all the subcategories with key examples seen in the export order book, production expectations and finished products. In line with business confidence, the eurozone’s Manufacturing PMI has also risen to 52.6 from the previous month’s data reading of 51.7 on the back of improvements in new orders, exports and strengthening employment.
Though business confidence has improved all around, the consumer confidence numbers have remained in negative territory at -8.2 as the consumer expectation of future financial stability has not changed, and this is also reflected in the retail sales data.
Broader view
Overall, there are some visible green shoots in the Eurozone stock market economy – in areas like improved business sentiment and the stronger inflation numbers. Consumer confidence still hasn’t improved as expected, and this will continue to play a negative role for the rate revision prospects in the region.
Furthermore, the data coming out of individual countries – like France (which has shown -0.1% GDP growth in the second quarter) and Italy (which has shown 0.00% GDP growth in the second quarter) – are some of the major contributors to the eurozone’s GDP report. This has been balanced to some extent by stronger economies like Germany and Austria, so there are still some factors that could change the impact on the European Central Bank’s next decisions.
The geopolitical and economic concerns that have come as a result of the Brexit event are still lurking on the horizon, and this will almost certainly ensure that the ECB will continue its expansionary monetary policy for an extended period of time. As long as this is the case, forex traders should consider shorting the euro either through options contracts or in spot positions in the major forex pairs.
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