EURUSD Remains Capped by the 20-Day SMA Ahead of the ECB Rate Decision

Fundamental Outlook

According to the Credit Suisse Overnight Index swaps, traders are pricing in a zero percent chance policy makers will hike borrowing costs twenty five basis points tomorrow as the 16 member euro area faces major headwinds ahead. As of late, the unemployment rate in the Euro-zone remained at a 12 year high for the month of July, with the breakdown of the report showing that the unemployment rate in Spain rose to 20.3 percent during the month from 20.2 percent in June, marking the highest rate of unemployed persons in the region. This is worrisome in that the austerity measures implemented by Spain’s governments will likely weigh on growth in the coming months, which is also a concern for the rest of the bloc as the euro area battles high budget deficits. At the same time, the annualized inflation estimate in August showed that consumer prices slowed to 1.6 percent in August from 1.7 percent the previous month, which takes pressure off of the central bank to hike rates. Also worth noting is Ireland’s government requesting an extension of the ECB guarantee program from 2008. Meanwhile, Allied Irish and Anglo Irish banks also called for an extension of the central bank’s program. This comes on the back of the S&P credit rating agency recently downgrading Ireland’s credit rating to AA-. All in all, all is not well in the Euro-Zone. The central bank will keep rates unchanged, and subsequent comments following the decision will likely dictate price action going into the North American trade.

Technical Outlook

Charts Created Using FXCM’S Strategy Trader

EUR/USD: After breaking below the broader and narrow ranges, the pair looks poised to test 1.2500 for near term support. Indeed, I have been short the pair since 1.3100, and as of late, I have moved my stop down to 1.2900 to lock in some additional profits. Going forward, price action has stalled at the 20-day SMA, and until we see a clear break and close above this moving average, downside risks remain.

Written by Michael Wright, Currency Analyst

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Michael Wright is the author of FX Headlines, Fundamentals vs. Technical’s, Weekly Spotlight, and Forex Trading Weekly Forecast