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EUR/USD Rate Outlook Hinges on ECB Forward Guidance

EUR/USD Rate Outlook Hinges on ECB Forward Guidance

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EUR/USD holds a narrow range ahead of the European Central Bank (ECB) interest rate decision, but fresh remarks from the Governing Council may sway the near-term outlook for the euro-dollar exchange rate as the quantitative easing (QE) program is set to expire in December.

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The ECB is expected to unveil an updated exit strategy as the central bank pledges to wind down its asset purchases to EUR15B/month starting in October, and a more detailed exit strategy may boost the appeal of the Euro as the Governing Council shows a greater willingness to move away from its easing-cycle.

However, President Mario Draghi & Co. may continue to highlight a dovish forward-guidance as ‘significant monetary policy stimulus is still needed to support the further build-up of domestic price pressures and headline inflation developments over the medium term,’ and the ECB may merely stick to the current script as ‘measures of underlying inflation remain generally muted.’

In turn, the Governing Council is likely to reiterate that euro-area interest rates are expected to ‘remain at their present levels at least through the summer of 2019,’ and more of the same from President Draghi & Co. may produce headwinds for the Euro as the central bank remains in no rush to normalize monetary policy.

Keep in mind, there appears to be a broader shift in EUR/USD behavior as it appears to be breaking out of the downward trending channel from June, with the euro-dollar exchange rate at risk of making a run at the August-high (1.1734) as it carves a fresh series of higher highs & lows. Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

EUR/USD Daily Chart

Image of eurusd daily chart

EUR/USD appears to be making a run at the August-high (1.1734) as the 1.1510 (38.2% expansion) appears to be offering near-term support, with a break/close above the 1.1640 (23.6% expansion) to 1.1680 (50% retracement) region raises the risk for a larger recovery. Need a break/close above the 1.1810 (61.8% retracement) hurdle, which largely lines up with the July-high (1.1791), to open up the topside targets, with the first region of interest coming in around 1.1960 (38.2% retracement) to 1.1970 (23.6% expansion).

For more in-depth analysis, check out the Q3 Forecast for the Euro

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--- Written by David Song, Currency Analyst

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.