What to Expect from ECB and Managing EUR/USD Trade
- EURUSD cracks weekly low and tumbles below $1.2600.
- New EURGBP trade on the table.
- EURUSD has been on a major losing streak since mid-August.
With the ECB's stress tests due at the end of the month and the ABS-program not yet having begun, it is unlikely QE is announced today. An additional dosage of stimulus now before the balance sheet review is revealed to the public could be damaging to morale; not dissimilar from a patient being administered medicine before being told what ails her - she would be concerned she has a problem.
So as the ECB simply tries to avoid nothing more than a PR blunder, the market will be forced to weigh its demand for additional action versus the acceptability of the timing. After all, the first TLTRO uptake was rather weak, but with the ABS-program due to begin in two weeks and another TLTRO event scheduled for December, there is still stimulus in the pipeline.
To keep the Euro lower then, promises of further action or details regarding the scope of the ABS-program - especially those that make the program seem wider in scope than otherwise thought - will be necessary. Futures positioning isn't at an extreme anymore (net-shorts -12% overall since week ended September 2), but is still at a point where it could provide some fuel to a short covering rally in EURUSD.
On the other hand, EURUSD remains below its daily 13-EMA which has been trend resistance for the past two months. FXCM's SSI notes that the retail crowd on balance is net-long EURUSD, and as a contrarian indicator, calls for further losses in the pair. The EURUSD SSI has a solid track record in 2014, having called for gains in EURUSD from January to mid-May, and has been biased short since then.
--- Written by Christopher Vecchio, Currency Strategist
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