Daily Briefing

EUR/USD Bounces From Key Support as Dovish Draghi Defers Taper Talk

Price action and Macro.

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Talking Points:

- This morning’s ECB rate decision saw the bank take a dovish tone while making no adjustements to monetary policy, both as was widely-expected. This helped to elicit a quick dip in the single currency, but that sell-off was limited as a bounce began to show shortly after the start of the press conference.

- This raises the question of whether Euro weakness will extend. While many were expecting a dovish tilt at this morning’s rate decision, the fact that weakness could not show more momentum may be a signal that EUR/USD is being driven by USD-trends; while a pair like EUR/JPY might be a bit more attractive for a fade of this morning’s quick-dip of weakness.

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ECB Goes Dovish – EUR/USD Puts in a Bounce

This morning’s ECB rate decision saw no move on rates as was widely expected. We did see ECB President Mario Draghi take a dovish tone, again, as was widely expected. And in response we saw an initial move of weakness in the single currency; but that momentum could not hold and we’re already seeing bounces starting to show. The key signal of dovishness at this morning’s rate decision wasn’t something that was said, but rather something that was left unsaid, and that’s what the bank might look to do when it comes time to move away from emergency-like monetary accommodation in the Euro-Zone.

As we were approaching Q2, the wide expectation was that we’d hear some element of a plan or strategy for what the ECB might do after September. And given the strength that had previously shown in the European economy, it made sense to look for a move towards ‘less loose’ monetary policy. But from all signs in the ECB’s statement this morning, the bank looks set to stay loose and dovish for the foreseeable future, even beyond the current QE program’s September end date.

During the opening statement at the press conference, Draghi specifically cited ‘moderation’ in data since the bank’s March meeting as a reason to remain cautious, while also pointing out that ‘underlying inflation remains subdued and has yet to show convincing signs of a sustained upward trend.’

All in all – this does not sound like a bank that’s close to a stimulus exit.

The net response was an initial hit of Euro-weakness, although that weakness was unevenly distributed; and we’re already seeing some bounce off of the lows. The downside move in EUR/USD was rather minor, while pullbacks in EUR/JPY and EUR/GBP were a bit more visible. Considering that the US Dollar is seeing strength after a very bullish week of price action, and a pullback in that theme can make sense; and that pullback in USD-strength is helping to offset some of this morning’s Euro-weakness.

EUR/USD Holds Key Support

Yesterday we looked at the level of 1.2167 in EUR/USD, and this is the 50% retracement of the 2014-2017 major move in the pair. This major move was the pricing-in of ECB QE, and over the past year as we’ve seen market participants trying to position for a stimulus exit, more than half of that prior bearish trend has been erased.

We’ve twice seen this level provide support earlier in the year: In mid-January and again in early-March. This was the three-month low in the pair until we tested through earlier this morning ahead of ECB.

EUR/USD Weekly Chart: 50% Retracement of 2014-2017 Move Helps to Hold the Lows

eurusd weekly chart

Chart prepared by James Stanley

EUR/USD: Is This Week’s Bearish Run Complete?

The big question around EUR/USD at this point is whether we’ll see a return of bullish price action. EUR/USD sank down to three month lows as US Dollar strength was piping-up over the past week, and this was very much based on the idea that the ECB could get some wiggle room to grow a bit more dovish given the recent slowdown in European data. But now that we have that in the books – are we going to see a continuation of EUR/USD weakness and USD strength?

On the four-hour chart below, we’re focusing-in on a key region around a prior point of resistance we looked at earlier in the week. This zone runs from around 1.2237 up to 1.2250, and this was a confluent point of resistance when sellers came back in on Tuesday. If we do see lower-high resistance from here, a re-test of 1.2167 becomes a possible play; but if we don’t see any resistance show, then we may have a deeper bullish move to work with in EUR/USD as those prevailing trends come back to order.

EUR/USD Four-Hour Chart: Bearish Continuation Prospects Should Lower-High Resistance Hold

eurusd four hour chart

Chart prepared by James Stanley

EUR/JPY Tests Below Prior Resistance as Bullish Trend Remains

As noted earlier, that initial dip in the Euro was a bit more visible away from the US Dollar. In EUR/JPY, we tested below a key point of resistance that had previously functioned as the two-month high in the pair; but bulls did return ahead of a trend-line re-test. This keeps the door open for bullish potential, and for those looking to trade Euro-strength after this morning’s rate decision, this may be a bit more attractive at the moment given the recent return of Yen-weakness.

EUR/JPY Four-Hour Chart: Strength Continues After ECB-Fueled Dip

eurjpy four hour chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

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--- Written by James Stanley, Strategist for DailyFX.com

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US Dollar Continues to Follow Rise in US Treasury Yields; ECB Tomorrow

News events, market reactions, and macro trends.

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Talking Points:

- The US Treasury 10-year yield is pushing its January 2014 high of 3.040% percent, giving the DXY Index an opportunity to retest the 2017 low at 91.01.

- The economic calendar is quieter today; all eyes are on the Euro with the ECB meeting set for tomorrow.

- Sentiment for the US Dollar remains mixed gains in recent days.

For longer-term technical and fundamental analysis, and to view DailyFX analysts’ top trading ideas for 2018, check out the DailyFX Trading Guides page.

The US Dollar (via the DXY Index) is trading at its highest level since January 12 as price flirts with a break back above the 2017 low near 91.01. Yesterday's close was the second consecutive close above the trendline from the November and December 2017 highs, giving further credence to the near-term bottoming effort that may be in play via the inverse head & shoulders pattern that formed throughout March.

The main catalyst for US Dollar strength continues to be the rise in US Treasury yields, which is proving a potent factor for pairs like USD/CHF and USD/JPY: weakness in equity markets is producing no such 'demand of safe haven' effect in the face of widening interest rate differentials. The US Treasury 10-year yield touched a high of 3.034% earlier today, just below the high of 3.040% set back in January 2014.

What to Expect for the ECB Meeting Tomorrow

Even though the European Central Bank policy decision tomorrow will not bring forward a new set of Staff Economic Projections, odds are seemingly high that ECB President Mario Draghi will strike a more dovish tone than he has in the past.

Part of the reason for disappointment in some of the data and inflation expectations in recent weeks can be attributed directly to the Euro itself: it remains up by nearly +9% year-over-year on a trade-weighted basis. The stronger the Euro is relative to its peers, the less appealing Eurozone exports appear, plain and simple.

Price Chart 1: EUR/USD Daily Timeframe (April 2017 to April 2018)

US Dollar Continues to Follow Rise in US Treasury Yields; ECB Tomorrow

Accordingly, despite no new projections being set forth, we expect that Draghi & co. will outline a more dovish set of expectations moving forward via the press conference held following the rate decision itself – a rate decision that will see no change in rates. In fact, looking at overnight index swaps, there is a 25% chance of a rate move by the end of 2018, but rates markets aren’t pricing in a policy change in earnest until at least Q3’19.

According to the CFTC’s COT report for the week ended April 17, there were +151.5K net-long contracts held by speculators, a new all-time high. At this juncture, it will be much easier for the ECB to push the Euro down than it will be for the Euro to stay elevated, much less rally.

See the above video for technical considerations in the DXY Index, EUR/USD, USD/JPY, USD/CHF, and the S&P 500.

Read more: DXY Bottoming Effort Takes Step Forward as Three More Hikes Eyed in 2018

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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Euro May Fall as Aussie, NZ Dollars Rise on Chastened ECB Stance

Fundamental analysis, economic and market themes

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TALKING POINTS – ECB, EURO, AUSSIE & NEW ZEALAND DOLLARS

  • Euro may fall as the ECB casts doubt on near-term QE tapering
  • Aussie, NZ Dollars may rise as dovish Draghi lifts risk appetite
  • US Dollar correcting from six week high in Asia Pacific session

All eyes are on the ECB monetary policy announcement in European trading hours. No formal changes to the central bank’s posture are expected but traders will probably put considerable weight on the tone of remarks made by President Mario Draghi at the subsequent press conference. A dovish lean might weigh on the Euro but could offer a lift to broad-based risk appetite.

Mr Draghi and his colleagues have signaled they are well aware of incoming disinflationary pressure from base effects arising the single currency’s explosive gains last year. That may be difficult to overcome by an economy where growth seems to have slowed sharply in the first quarter, according to leading PMI surveys. This might prompt signaling that an extension of QE remains on the table.

The current program making €30 billion in asset purchases per month expires in September. An abrupt end seems broadly understood as ill-advised, so traders have been waiting for the ECB to unveil whether it will “taper” uptake into the current end-date, announce a plan to begin doing so thereafter, or prolong the effort. Setting the stage for a June decision alongside a forecast update may well happen today.

Comments that explicitly cast doubt on whether the ECB favors tapering versus prolonging QE bode ill for the Euro. So too does vague rhetoric hinting that uncertain officials fear tightening prematurely. The prospect of a longer-lasting ECB liquidity backstop may boost risk appetite however, boosting the sentiment-geared Aussie and New Zealand Dollars.

The US Dollar corrected lower in otherwise quiet Asia Pacific trade, retracing some of its steps after soaring to a six-week high. Swelling Fed rate hike speculation still seems to be the driving catalyst, with the spread between the 10-and 2-year Treasury bond yield telling widening to the biggest in a month. Meanwhile, the tightening path through 2019 priced into Fed Funds futures steepened.

See our quarterly FX market forecasts to learn what will drive prices through mid-year!

ASIA PACIFIC TRADING SESSION

Euro May Fall as Aussie, NZ Dollars Rise on Chastened ECB Stance

EUROPEAN TRADING SESSION

Euro May Fall as Aussie, NZ Dollars Rise on Chastened ECB Stance

** All times listed in GMT. See the full economic calendar here.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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