The May ECB meeting

On Thur 7 May 09, the ECB will conclude their May meeting and many expect them to announce a rate cut of 25bps as well as some form of 'unconventional measures' to ease credit conditions in the Eurozone.

Pres Trichet and co are keeping their cards real close to their chests and not divulging what kind of 'unconventional measures' would be employed.

But I suspect there won't be so much of QE or Quant Easing, employed by both the Fed and BOE. Because three quarters of the supply of the EZ's credit comes through banks, lesser on securitization of debt, hence there is more of a need to target bank lending instead of the secondary securities market.

QE through the form of direct purchase of corporate debt by the governments is hence, unlikely.
Judging from price action of the EURUSD today, it seems there has been good and consistent buying, with the pair stabilizing around the 1.33 pivot after crashing to low 1.32 after the release of the WSJ report that BoA needed a massive USD 34 bn in additional capital.

Perhaps this is why..

1. Pre-empting the ECB outcome tomorrow, the market is buying on the rumour and will sell on the news. As traders expect the ECB to not implement QE, the Euro will be supported up until the announcement and get sold off after.

I have written before in previous posts on the lack of fundamental reasons to expect the EURUSD to go much higher. It will continue to trade in the downward channel - which I also illustrated on a previous post. Mid 1.31 is a likely target.

2. Less likely to occur: If the big surprise happens and the ECB does announce QE, the Euro will see a fire-sale. Selling EURGBP, EURCHF would be good ideas in this case.

Either way, I see the EURUSD to sell off at the end of the day.

3. But of course, if later in the NY session, the US bank stress test results are better than expected i.e. lesser than the reported 10 banks need more capital and the biggies like BoA and Citi require substantially less capital, then the mood will turn positive, leading to the buying of higher yielding currencies like the Euro, GBP and AUD.

Barring ECB QE, the EURUSD will go higher.