The euro continues to strengthen versus the USD in trading. However, the rally seems to be slowing down as it approaches the 1.1250 area. From a fundamental point of view, economists are not convinced that the European Central Bank (ECB) is truly capable of launching additional effective monetary stimulus to combat the threat of the Coronavirus outbreak at next week's policy meeting.

A few days ago, ECB President Christine Lagarde expressed readiness to take immediate action to tackle the potential impact of the Coronavirus outbreak. However, he has not yet explained clearly what form of policy will be taken.

This is a source of uncertainty that drives some parties to choose wait-and-see. The latest Bloomberg survey results show as many as 60 percents of economists predict the ECB will not cut interest rates again.

The majority of respondents also predicted the ECB would not change its bond purchase program. Only a few economists indicated that the ECB would double the value of the program. Economists' expectations contradict the assumptions of financial market participants.

According to Bloomberg, investors now bet there is an 85 percent chance of ECB rate cuts. The condition of the ECB interest rates that are already far in the negative area has limited the space for the central bank.

Success Rate of ECB Policy

Although the ECB takes certain policies, the results are not necessarily effective in boosting the Eurozone economy. "Any action will only be an attempt to show that the ECB can still act," said Alexander Koch, an economist at Raiffeisen, Zurich. "The action taken does not necessarily achieve anything in the Eurozone economy."

Several other major central banks have taken a more dovish step this week. The Australian central bank cut interest rates by 25 bps, while the Federal Reserve and the Canadian central bank cut interest rates by 50 bps.

The head of the old British central bank has delivered a signal of monetary easing, although the probability of executing the signal is still questionable in connection with the change of position.

The euro stepped back from record two-month highs versus the Greenback in trading (3 / March), after the European Central Bank (ECB) signaled readiness to immediately take "targeted" action to overcome the effects of the Corona COVID-19 virus outbreak. A few days ago the ECB President had stated that there was no need to take action related to this economic threat.

Over the past week, the Euro has rallied due to the liquidation of global carry trade assets. However, one type of risk-off action seems to have begun to subside this week, so the Euro loses its main engine in the short term.

Euro Shrinks Due to ECB President's Statement

The latest dovish ECB President's statement has further diminished Euro buying interest among traders and investors.

An official statement delivered by ECB President Christine Lagarde said, "The Corona virus outbreak is a pandemic that is developing very rapidly, and creates risks for the economic outlook and the functioning of the financial markets. We are ready to take appropriate and targeted policies as necessary and in accordance with the underlying risks ."

In line with that statement, market participants are now expecting the ECB to make policy changes at the 12 March meeting. There is a possibility the ECB will cut its negative interest rates again. However, given the term "targeted" in Lagarde's statement, the probability of a policy change is more likely to be a TLTRO expansion.

The TLTRO loan scheme is a form of ECB loose monetary policy that is expected to encourage general banks to channel funds to the public through financing the real sector. Targeted expansion of TLTRO can be done by loosening special financing requirements for SMEs most vulnerable to the effects of the Coronavirus outbreak.