FX.co ★ ECB & Fed: The battle of the titans begins, the euro on the "front sight"

Another round of the trade war between the United States and Europe begins today. The first shot for Frankfurt. If the ECB drastically softens the policy in order to surely and deeply drown the euro, the Fed may respond next week by lowering the rate by 50 bp at once. The market will react with a wave of sales of the US dollar.

The European regulator almost convinced traders of their intention to go for a quick monetary expansion. Among other things, this is indicated by the fall in the yield of 10-year German bonds to a record minimum (minus 0.46% versus 0.6% in October). The rates on 20-year bonds went into a minus, pulling out their European and world counterparts. It must be admitted that the reasons for the ECB to stimulate the economy of the region are weighty. The deterioration of the national macroeconomic situation is obvious. In Germany, the business activity index in the manufacturing sector, published on Wednesday, indicated that the largest economy of the currency bloc had entered a recession. As a whole, the figures for the Eurozone look no less pessimistic.

Thus, traders are waiting for a new monetary stimulus from the Bank of Europe, and Mario Draghi is not one of those who strongly disappoint the market. Since its inception as head of the ECB in 2011, the Bloomberg Barclays index, which tracks the region's debt prices, has risen by 46%, while the world's equivalent is only 13.6%.

At today's ECB meeting, Money markets impose a 53% probability of a 10-bp deposit rate cut in prices. They are confident that the figure will be at the level of minus 0.5% in September. The question is: will the management of the regulator (headed by Draghi) want to surprise the market in the form of policy easing? If so, it will most likely drown the euro, although not for long. Why? Because the answer of the American regulator next week will knock down the EUR/USD bears.

Do not exclude another scenario. Mario Draghi can only indicate his intention to ease monetary policy in the near future; For example, by September, it should be ready for the growth of the single currency. Such actions have already been taken into account in the EUR/USD quotes. Traders could see how the principle of "sell on rumors, buy on facts" works by watching the pound. The sterling had fallen exactly until the moment that Boris Johnson was declared the prime minister of Great Britain as a supporter of aggressive Brexit. Then, it began closing short positions.

Be that as it may, the euro is now risking a change in one direction or another. Euro "Bears" pin great hopes on the potential restart of the quantitative easing program. If this is announced at the upcoming meeting, the EUR/USD pair will go below 1.11.