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ECB, Bank of England seen easing next week

NEW YORK (MarketWatch) -- Risky assets, including stocks and the euro, rallied Friday after the European Union managed to agree on more policy steps to address the credit crisis than markets had anticipated.

Traders expect the European Central Bank to also chip in by cutting rates next week to an all-time low. The Bank of England is also likely to ease monetary policy further by expanding its debt-purchase program.

"The second story in FX is now taking shape: what will the ECB do?" said Boris Schlossberg, managing director of foreign-exchange strategy at BK Asset Management. "The answer to that will drive trade in the euro-dollar (EURUSD) next week."

The European Central Bank, meeting on Thursday, will likely cut its benchmark rate to 0.75% from 1%, analysts at Citi and Credit Suisse forecast.

"Our house view is that the ECB will get to 0.5% by the end of the year, but that it will take an incremental approach and end up cutting rates again in the fourth quarter," said Greg Anderson, a currency strategist at Citi. "We acknowledge the outside chance of a 50-basis-points rate cut at the July meeting, though."

Of more importance, however, will be if the ECB opts to restart any of its previous measures that supported financial markets, he said. That could entail buying sovereign debt or another long-term refinancing operation to inject more liquidity into the system. Either of those would be positive for the euro, according to Anderson. Read about euro gains.

But if ECB President Mario Draghi "has no new news and no change in tone on those two issues, we suspect that euro bears will growl and sell some more," he said. "We would presently lean toward that result."

The Bank of England's monetary policy committee also meets Thursday.

Credit Suisse analysts expect the central bank to expand its current asset-purchase program by 75-billion pounds, although that may be split into two stages of £50 billion and £25 billion, they wrote in a note.

Sterling (GBPUSD) has gained 0.9% against the dollar this year as traders see it as a kind of anti-euro. The euro (EURGBP) has dropped 3% versus the pound so far in 2012.