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EUR/USD Rate Vulnerable to Dovish European Central Bank (ECB)

EUR/USD Rate Vulnerable to Dovish European Central Bank (ECB)

David Song,

EUR/USD pares the weakness from earlier this week following the failed attempt to test the monthly-low (1.1306), but fresh comments coming out of the European Central Bank (ECB) may drag on the exchange rate as the Governing Council remains in no rush to remove the zero-interest rate policy (ZIRP).

Image of ECB interest rate

It seems as though the ECB will attempt to buy time at its first meeting for 2019 as the central bank struggles to achieve its one and only mandate for price stability, and the Governing Council may strike a rather dovish tone as officials reduce the growth forecast for the monetary union.

It remains to be see if the ECB will alter the forward-guidance later this year as euro-area interest rates are ‘expected to remain at their present levels at least through the summer of 2019,’ and the weakening outlook for the global economy may push President Mario Draghi and Co. to further insulate the euro-area as ‘the Governing Council stands ready to adjust all of its instruments, as appropriate, to ensure that inflation continues to move towards the Governing Council’s inflation aim in a sustained manner.’

In turn, more of the same from the ECB may produce headwinds for EUR/USD, with recent developments in the Relative Strength Index (RSI) warning of further euro-dollar weakness as the oscillator snaps the upward trend from late-2018. 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

The outlook for EUR/USD has become uneventful ahead of the ECB meeting as the exchange rate holds a narrow range, and a batch of dovish comments may drag on the exchange rate, which may spur a run at the monthly-low (1.1306). A break/close below 1.1290 (61.8% expansion) opens up the 2018-low (1.1216), which lines up with the 1.1220 (78.6% retracement) hurdle, with the next area of interest coming in around 1.1140 (78.6% expansion).

Keep in mind, the break above the November-high (1.1500) instills a constructive outlook for EUR/USD even though the RSI snaps the bullish formation from late-2018, and a move back above the 1.1390 (61.8% retracement) to 1.1400 (50% expansion) region raises the risk for a move towards 1.1510 (38.2% expansion), with the next area of interest coming in around 1.1640 (23.6% expansion) to 1.1680 (50% retracement).

For more in-depth analysis, check out the 1Q 2019 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.