ECB RATE DECISION, EURUSD FORECAST– TALKING POINTS
- EURUSD may finally capitulate and break below critical support channel
- ECB rate decision, commentary may fuel rapid selloff and pressure Euro
- Markets will then brace for next week’s FOMC rate decision and outlook
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Early into Thursday’s Asia Pacific trading hours, the Australian Dollar suffered a blow after RBA Governor Philip Lowe announced the central bank is prepared to ease policy further if necessary. He also said that he is unlikely to consider a hike until inflation is seen returning to the RBA’s target. Given the current trajectory for global growth, that could be a long time.
ECB RATE DECISION: WHAT TO EXPECT
Overnight index swaps are pricing in a less-than-even chance of a rate cut at the upcoming ECB meeting. However, this in no way suggests that there is limited scope for downside moves for EURUSD. Market participants will be keenly watching for dovish commentary or hints of how policymakers are feeling about reinforcing accommodative policy whether that be through the rate cuts or the reintroduction of QE.
At a meeting in Sintra, Portugal, ECB President Mario Draghi hinted at using these policy measures to boost economic activity and tepid inflation. Eurozone data has been tending to underperform relative to economists’ estimates. Between wrestling with Brexit, Italy and US trade threats, the Eurozone has also had to contend with its own sluggish growth prospects which have left producers and consumers with a pessimistic outlook.
EURUSD TECHNICAL ANALYSIS
As forecasted, Eurozone PMI data underwhelmed markets and EURUSD suffered, though the pair stopped just short of breaking below critical support. The long wick indicated that market participants wanted to go lower but follow through was lacking in large part due to traders’ trepidation in committing capital prior to the ECB announcement.
EURUSD Flirts Along Lower Lip but Fails To Breach
However, if the ECB’s outlook spooks markets, EURUSD may just have the momentum it needs to break through support with lasting follow through. The pair could aim to test the two-year low at 1.1023, considering breaking below its predecessor at 1.1105 seems fairly likely. The fundamental outlook suggests as conditions worsen, a premium will be put on liquidity and will result in capital pouring into USD and pressuring the pair.
Is Capitulation Inevitable?
EURUSD TRADING RESOURCES
— Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com
To contact Dimitri, use the comments section below or @ZabelinDimitrion Twitter