Euro on the line as ECB decides

Dec 03, 7:15 am
Euro under pressure

The Single currency is likely to come under a lot of pressure today as the European Central Bank meets. Expectations are rife that the ECB could mark another major milestone in its monetary policy storyline, in little under a year of announce the QE program in January this year.

Although nothing is set in stone as of yet, expectations that the Central bank could expand its QE program, taking it beyond the current €60 billion in bond purchases.

There have been rumors that the bond purchases could also be further expanded to cover municipal bonds as well. On the conventional monetary policy front, there is a strong speculation that the ECB could further cut its deposit rates, deeper into negative territory. With the latest flash CPI estimates continuing to point to weak inflation data, the ECB is likely to be compelled to act and anything short of QE could trigger a strong reaction in the markets.

The Euro has fallen nearly 6.8% since the October 22nd ECB meeting where Mario Draghi announced that the European Central bank would decide on QE expansion and other policy measures at its meeting in December. The currency gained momentum as diverging monetary policies between the ECB and the US Federal Reserve continued to move in opposite directions.

Speaking at an event yesterday, Fed Chair Janet Yellen discussed the progress made in reaching the Fed’s dual mandate and the substantial improvement in the US labor markets while noting that the committee remained short of reaching its inflation target. Noting that the Fed members were confident that the US economy was ready to digest a monetary policy tightening cycle, she reiterated that the Fed was confident of reaching its 2% inflation target over time.

The US Dollar continues to remain strong in the run up to the Fed’s meeting in just under a few weeks time.

Following today’s ECB announcement, Janet Yellen will also be testifying to the US senate and her comments will be closely monitored, keeping the EURUSD strongly volatile. The Fed remains confident to announce a rate hike in December ahead of tomorrow’s nonfarm payrolls report, which is unlikely to cause a dent in the plans unless the numbers disappoint on all fronts. Inflation continues to hover below the Fed’s target inflation rate but it is unlikely to be a reason for the Fed to hold off the rate hikes.

EURUSD – Technical Analysis

EURUSD is currently trading near a previous support level of 1.059 – 1.0514, the lows previously tested around early February this year just a few weeks after the ECB announced its QE program. If this support holds, EURUSD could possibly see a leg higher off the current support targeting the previously broken support at 1.083 – 1.087 region.

EURUSD - Daily Chart, ahead of the ECB Meeting
EURUSD – Daily Chart, ahead of the ECB Meeting

To the downside, a break below 1.0514 could see the EURUSD decline towards 1.022 level, marking a measured move off equidistant price channel breakout. On the longer horizon, EURUSD is looking at a potential bear flag pattern as well, which could see the single currency break towards parity in the medium term outlook.

There is also the Stochastics divergence to bear in mind which points to a possible retracement back to the potential resistance level to the upside.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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