EUR/USD – Breaking 1.05.

EUR/USD – Breaking 1.05.

EUR/USD – Breaking 1.05.

When the European Central Bank unveils a fresh round of stimulus on Thursday, the announcement will not be a surprise for most investors. Euro traders have had plenty of time to prepare for the move and based upon the 8% decline in the EUR/USD over the past 6 weeks, they sufficiently discounted fresh easing from the central bank. However many analysts believe that EUR/USD is headed for parity and we agree that the path of least resistance for the euro is lower. Euro is extremely oversold but with less than 24 hours to go before the monetary policy announcement, there’s still significant uncertainty surrounding the actions that the ECB will take. We do not believe that investors have sufficiently discounted the potential aggressiveness of the central bank’s actions. Draghi could choose one or a combination measures and the more actions they take the more weakness we expect in EUR/USD. Extending the end date of QE is almost certain since it was always a soft target. The same is true for front loading bond purchases – they’ve done it before and will do it again. Lowering the deposit rate will automatically broaden the bonds they can purchase because the ECB prefers not to lose money but yields would adjust quickly. Broadening the types of assets purchased to include sub-sovereign bonds and nonperforming loans is the most controversial. In addition to these actions, the ECB’s forward guidance will also have a significant impact on the euro – if they maintain an easing bias and suggests that they are willing to increase stimulus further, then a 2 to 3 big figure move in EUR/USD would not be a surprise. If the ECB shifts to a wait and see mode after easing, the initial 1 to 2 big figure decline (depending on the aggressiveness of the program) could find support quickly.

Technically, a 1 big figure move is all EUR/USD needs to break 1.05. For the past 3 days 1.0550 has served as near term support for EUR/USD and once that’s broken the main focus will be on 1.05. Below 1.05 there is minor support at the 2015 low of 1.0459 and then no major support for the currency pair until 1.00 (parity). The main resistance on the upside is 1.0830.

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