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EUR/USD Bounces off Support Ahead of the ECB Decision. What Can Traders Expect?

EUR/USD Bounces off Support Ahead of the ECB Decision. What Can Traders Expect?

Diego Colman, Market Analyst

EURO AND ECB OUTLOOK:

  • ECB's monetary policy decision will be the focus of market attention on Thursday
  • No change in interest rates is expected, but the central bank could tweak its guidance and signal that asset purchases will end "early" in Q3 in light of historically high inflation
  • Any progressively more hawkish message will boost EUR/USD, although gains are likely to be short-lived

Most read:Euro Q2 Technical Forecast - EUR/USD Eyes Further Weakness on Ugly Technicals

The European Central Bank will announce its April monetary policy decision tomorrow. No interest rate adjustment or new macroeconomic projections are expected at this meeting, but that does not mean that the event will be a snoozer; on the contrary, the gathering may be a source of strong volatility, particularly for the euro. Traders should closely follow the policymakers' assessment of the economic outlook, as well as their guidance regarding future actions, including any comments on asset purchases in light of rapidly changing market conditions.

After struggling to push inflation toward its 2% target for many years, the landscape changed dramatically in the aftermath of the pandemic, and even more so in recent months following the Russian invasion of Ukraine. Now, the ECB confronts the opposite predicament: blistering inflationary pressures; in fact, euro area headline CPI reached an all-time last month at 7.5% amid soaring energy costs, raising questions whether the institution is behind the curve in its fight to restore price stability.

Although some central bank members appear keen to unwind stimulus more forcefully and have echoed this sentiment, it is unlikely President Christine Lagarde will deliver any major bombshells, especially as downside risks to the growth profile have risen and now threaten to tip the economy into a recession.

However, Lagarde could tweak recent communication and signal that the asset purchases program could end early in the third quarter, as opposed to the prior vague assessment that the bond-buying scheme would concludesometime in the third quarter.

The incrementally hawkish message, while not a major departure from previous statements, may help to cement expectations that the first interest rate hike will occur in September, a scenario that may spark a bullish reaction in the euro, albeit temporary. That said, there is room for some EUR/USD strength in the coming days, but not for lasting gains, as the substantial monetary policy divergence between the Fed and the ECB remains a tailwind for the US dollar.

EUR/USD TECHNICAL ANALYSIS

After relentless losses since the outset of the month, EUR/USD appears to be rebounding off a key support near the 1.0800 psychological level ahead of the ECB announcement (EUR/USD is up 0.37% to 1.0879 at the time of this writing). If the pair manages to extend its advance in the coming sessions, initial resistance is seen at 1.0950. If we see a break above this ceiling, buying interest could strengthen, paving the way for a possible move towards 1.1135. On the other hand, if the sellers return and push the exchange rate lower, support appears at 1.0800. If this floor is taken out decisively, EUR/USD could challenge 1.0730, followed by the 2020 low.

EUR/USD TECHNICAL CHART

EUR/USD Bounces off Support Ahead of the ECB Decision. What Can Traders Expect?

EUR/USD chart prepared in TradingView

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---Written by Diego Colman, Contributor

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

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