ECB Preview- EUR/USD Rally Faces Moment of Truth

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Talking Points

• EUR/USDresponds to up-slope resistance, looking for validation of 2015 trendline breakout
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EUR/USD Daily Timeframe

Technical Outlook: Euro tested up-slope resistance yesterday after breaking above a multi-year trendline extending off the August 2015 high. Heading into the European Central Bank (ECB) interest rate decision tomorrow, the immediate focus range is 1.1439-1.1616. The immediate advance as at risk while within this range with the broader outlook weighted to the topside while above 1.1285.

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EUR/USD 240min Timeframe

Notes: A closer look at price action sees the pair reversing off up-slope resistance this week with the 2016 high converging on the 75% line just higher at 1.1616. Interim support rests at 1.1495 with the immediate focus higher while above 1.1439- A break below this region would risk a larger correction targeting 1.1366 & broader bullish invalidation at 1.1285-1.1312.

A breach of the highs keeps the broader long-bias in play targeting subsequent topside objectives at 1.1714 & the upper parallel (currently ~1.1770s). As always, these interest rate decisions invite a great deal of volatility and the focus will be on the accompanying commentary from President Mario Draghi.

From a trading standpoint, I would be looking to fade weakness on a spike lower tomorrow into the lower parallels – If euro is heading higher, price should hold above the weekly range lows. At the same time, failure at the upper parallel again would suggest near-term exhaustion in price- stay nimble into the release.

• A summary of IG Client Sentiment shows traders are net-short EUR/USD- the ratio stands at -2.27–bullish reading
• We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise. That said, Positioning is less net-short than yesterday but more net-short from last week and the combination of current sentiment and recent changes gives us a further mixed near-term trading bias.
• Bottom line: Sentiment is coming off extremes and highlights the near-term risk to this advance in the Euro but ultimately, I’m looking to fade a pullback in the pair targeting a breach of the 2016 highs.

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Relevant Data Releases

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Other Setups in Play:

• GBP/USD Rejected at Resistance- Price Constructive Above 1.2890
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• USD/JPY Rally Vulnerable Ahead of U.S. CPI

- Written by Michael Boutros, Currency Strategist with DailyFX

Follow Michael on Twitter @MBForex or contact him at mboutros@dailyfx.com.