EUR/USD – Its Time for a Breakout

EUR/USD – Its Time for a Breakout

EUR/USD – Its Time for a Breakout

The ECB is widely expected to ease monetary policy this week yet the euro refuses to fall, which leads many investors to wonder if easing has been completely priced in. The market expects the central bank to lower the deposit rate (a decision they passed on in December), but there’s very little consensus on the actions they could take. The ECB experienced the consequences of under delivering last year and they will want to avoid a decision that could squeeze EUR/USD higher, undermining the effects of the stimulus. Besides lowering the deposit rate, the ECB could increase the amount of assets purchased per month, extend the end date of bond buying and possibly even introduce new TLTROs. Since analysts are predicting an increase to the QE program of anywhere from zero to 20 billion euros, there’s plenty of room for surprise. In addition Mario Draghi could talk about doing more in the coming year that could also affect how the euro trades. Therefore while we agree that investors have priced in a 10bp deposit rate cut, there’s so much more the ECB could to do that would weaken the euro.

Technically, EUR/USD is trapped between 2 moving averages and Fibonacci levels. Above we have the 200-day SMA near 1.1050 and the 50% Fibonacci retracement of the March 2015 and August 2015 rally near 1.11. Below there’s the 61.8% Fib of the same move right at today’s low and then the 100-day SMA. The ECB rate decision certainly has the significance to break the pair out of its range and given the fundamental backdrop we are still looking for a downside break.

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