EUR/USD – Levels to Watch Post ECB

EUR/USD – Levels to Watch Post ECB

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EUR/USD -- Levels to Watch Post ECB

EUR/USD is trading sharply lower ahead of the European Central Bank’s monetary policy announcement. Over the past 6 weeks there’s been widespread deterioration in business activity prompting investors to position for a dovish outlook. Even Germany’s Bundesbank head said recent indications for Germany in the first quarter were “not so brilliant.” However we can’t assume overwhelming dovishness from Draghi because last Friday he also said their confidence in the inflation outlook increased as the growth momentum is expected to continue. Inflation has also been on the rise so underneath the weakness there are positive developments. The question for Thursday is whether recent deterioration overshadows the uptick in inflation and positive growth momentum. We know that the ECB is not ready to raise interest rates and they certainly don’t want to see EUR/USD back above 1.24 because that would offset the improvements in prices. Yet they also want to end QE purchases this year -- so Mario Draghi has quite the balancing act to do on Thursday.

If ECB is dovish and the EUR/USD falls, the next stop should be 1.2100, which was resistance in early January and then 1.20, the 200-day SMA. EUR/USD has already broken below the 100-day SMA so the path of least resistance is lower. If they are not as dovish as investors anticipate and EURUSD finds itself back above 1.2250, the rally should extend to at least 1.2320.

Will ECB Drive EUR to 1.25?

Will ECB Drive EUR to 1.25?

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Will ECB Drive EUR to 1.25?

After rising for 4 straight days, EUR/USD pared its gains ahead of Thursday’s European Central Bank monetary policy announcement. The ECB is widely expected to leave monetary policy unchanged but among all of this week’s rate decisions, theirs should be the most market moving. Policymakers have been very clear that sometime this year, their guidance will change and the only question is how quickly they will start talking about unwinding Quantitative Easing and raising interest rates. Although data has taken a turn for the worse since the last meeting, it is important to realize that many of these indicators are slowing from multi-month or year highs, which means they are retreating from very strong levels. The Eurozone economy is still performing well, stocks are off their highs, Italy’s election may have led to a political stalemate but in Germany, Angela Merkel has won the right to form a coalition government with the Social Democrats, ending months of political uncertainty. The euro is strong but it hasn’t appreciated further than its end of January levels. When the ECB last met, President Draghi acknowledged the euro’s rise by warning that euro volatility creates uncertainty but then spent the majority of his press conference talking about the solid and broad based momentum in the economy and the prospect of higher growth surprises that could lift core inflation over the medium term. We don’t expect these views to change at this week’s meeting and given the market’s desire to sell U.S. dollars, ECB optimism could be drive EUR/USD back to 1.25. Yet if Draghi suddenly sounds more cautious, we could see a nasty reversal in EUR/USD as speculators are clearly leaning towards optimism

Will ECB Stop EURO from Hitting 1.25?

Will ECB Stop EURO from Hitting 1.25?

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Will ECB Stop EURO from Hitting 1.25?

Thursday’s European Central Bank monetary policy announcement is the most important event risk this week. The euro is trading strongly ahead of the rate decision despite the risk of ECB President Draghi jawboning the currency. Since their last meeting in December, EUR/USD is up close to 5% and while a number of ECB officials have come out speaking against the currency’s rise, investors are waiting on Draghi. The problem is that we’re not sure he’ll say enough to halt the currency’s gains. Its important to realize that the euro is rising under the backdrop of a weaker dollar, hope for early guidance change a and stronger Eurozone growth. In order for traders to stop buying euros and start selling, Draghi needs to unambiguously dovish. That means expressing currency concerns and downplaying the chance of a guidance change. He can accomplish that by saying rate hikes won’t come until after QE ends and that the market misinterpreted the ECB minutes. In this case, EUR/USD will fall with profit taking possibly driving the pair below 1.23. However if Draghi expresses concerns about the currency but focuses on the improvements in the economy and acknowledges the possibility of early guidance changes, buyers will sweep in quickly especially following knee jerk decline and we may find EUR/USD on its way towards 1.25 because the trend is on the side of the currency.

Technically, there are 2 key resistance levels about the current one, the 200-day SMA near 1.2430 and then 1.25.

Today’s Trading Plan 06.08.2017 – USDJPY and AUDJPY (EUR only after ECB)

Swing

*Good morning/afternoon everyone!*

European currencies are in focus this morning with the ECB meeting at 11:45AM and the UK vote throughout the day. The first results will be released around 21 GMT with the election likely to be called around 00:00 -- 1:00 GMT. EUR is trading with a heavy bias ahead of the rate decision against 1.13 as investors worry that Draghi will not be hawkish enough which means a lower inflation forecast and a risk assessment that cites downside risks.

Sterling is rising and falling on the polls. We expect some good 2 way action in pound before the polls close this afternoon. We have a full day before that happens so strap in for a wild ride before and after the election. The recovery in yields has taken USD/JPY above 110 on the confidence that Comey’s testimony won’t be damaging to Trump. We think gains are capped at 110.50 and see 110.40-110.50 as a good place to reestablish short positions.

USD/CAD looks like its finding resistance at 1.35 and could drift back down to 1.3440. AUD is weighed down by last night’s weaker trade report while NZD continues to fly high.

*The MAIN THEMES I see today are*

USD strength vs. JPY and CHF
NZD strength
CAD strength

AUD underperformance vs. NZD
EUR -- theme will emerge after ECB

*Trading Biases*
These will change after US data

+NZD, +CAD, +USD
-JPY
slightly +AUD

have to wait post ECB to trade EUR
marginally +GBP

*Today’s Potential Ideas*

**No view on EUR trades pre-ECB, no view on GBP trades

I like

+USDJPY at 110.05 with a stop at 109.75 aiming for 110.40
+NZDJPY at 79.25, with a stop at 78.75, Target 79.55

EUR/USD to Break on ECB, Key Levels to Watch

EUR/USD to Break on ECB, Key Levels to Watch

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EUR/USD to Break on ECB, Key Levels to Watch

The European Central Bank’s monetary policy announcement is the most important event risk on the calendar next week. While no immediate changes in monetary policy is expected, ECB President Draghi is expected to remind investors that inflation is low, the economy is weak and easier monetary policy may be needed. Consumer spending has been particularly soft, manufacturing and trade activity took a hit after Brexit and most importantly, inflation remains well below target with year over year core CPI growth slipping to 0.8% from 0.9% in August. Aside from the decision on rates and Draghi’s press conference, the central bank will also release its economic projections and if changes are made, they will likely be euro negative given the deterioration in manufacturing and inflation data over the past week.

Like many of the major currency pairs, EUR/USD went on a rollercoaster ride post NFPs but the currency pair ended the week below the 100 and 20-day moving averages which puts it on track for a move down to 1.1125, where we have the 50 and 200-day SMAs. If this support is broken and EUR/USD also breaches 1.11, 1.1050 will be next. If 1.1125 holds, EUR/USD could drift up to 1.1215 with the “breakout” of these moving averages determined the level of ECB dovishness.

Euro – Back to pre ECB Lows?

Euro – Back to pre ECB Lows?

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The euro started the year on the wrong foot making a massive wick yesterday and dropping further today as it is down by more that two big figures in 2 days. The pair may be finally starting to respond to interest rate differential pressures as the short squeeze post ECB finally runs out of gas.

The spread between Treasuries and bunds continues to hold and as long as it does not not compress much the euro will likely remain under pressure as basic fundamental flows finally take over from technical factors that have dominated trade for the past month. The key to the near term direction of the pair will be this Friday’s NFPs. If the market sees another blockbuster report of 250,000 or more it will likely begin to price further rate hikes by the Fed which in turn will widen the Treasury/Bund spread and drive the pair lower. If however the labor numbers are weak its back to the 1.0900s for the unit.

ECB Could Drive EURO to 1.12

ECB Could Drive EURO to 1.12

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ECB Could Drive EURO to 1.12

The ECB meeting is one of the most important event risks next week. Over the past month, EUR/USD traders completely ignored the deterioration in the German economy because of positioning. The market was short euros on the belief that the Fed would tighten but the negative news flow from the U.S. scared them out of their positions. However investors and policymakers will not be able to ignore European data for much longer if the weakness continues. The ECB is not expected to increase stimulus next week because recent comments from European policymakers show no urgency to add QE but many major banks believe they will have no choice but to increase stimulus in the coming months. We have already seen some policymakers bend – earlier this week ECB member Nowotny said that with inflation targets clearly being missed, “its quite obvious that additional sets of instruments are necessary.” Even if the ECB ends up noncommittal, Friday’s PMI reports are likely to show further deterioration in the EZ economy.

Technically, EUR/USD raced to a high of 1.1493 on Thursday, just a few pips shy of 1.15 before reversing sharply. Resistance is obviously back at this key level of 1.15. Support is at 1.1190, the 61.8% Fibonacci retracement of the 2000 to 2007 rally.