Talking Points

- The Euro trade-weighted exchange rate is up by +9.7% year-over-year, and inflation in the Eurozone continues to run well below the ECB’s medium-term target of +2%: this is a mix that calls for a dovish hue to ECB commentary.

- Many EUR-crosses remain trapped in ranges, in particular, EUR/GBP and EUR/USD; the former is closer to a breakout than the latter.

- Retail trader sentiment suggests further gains are possible for both EUR/GBP and EUR/USD, given positioning ahead of the meeting.

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The European Central Bank’s March meeting today will produce a new set of Staff Economic Projections. This is one of the four meetings during the year in which the central bank does so, raising the bar in terms of risk for the Euro.

Given that the Euro trade-weighted exchange rate is up by +9.7% year-over-year, and inflation in the Eurozone continues to run well below the ECB’s medium-term target of +2%, it seems inevitable that there will be some degree of pushback from President Mario Draghi and the Governing Council over an early exit from their QE program. Just how much is the question.

Indeed, even if policymakers continue to point to another small taper once the current pace runs its course in September 2018, they are likely to signal that there will be a ‘buffer window’ in which no more asset purchases are being untaken but rates will remain on hold. We’re not looking for the ECB to signal that they’ll be raising rates until at least Q3’19.

Overall, it appears that we could be looking at a redux of the January meeting in terms of price action: when all is said and done, EUR-crosses will end the day closer to their opening levels than choosing a direction overall.

Price Chart 1: EUR/USD Daily Timeframe (July 2017 to March 2018)

Euro Turns to ECB for Directional Cues: EUR/GBP, EUR/USD in Ranges

EUR/USD has carved out a new range between 1.2155 and 1.2559 over the past three weeks, with both support and resistance defined by daily key reversals. Even though price remains above its daily 8-, 13-, and 21-EMA envelope, momentum indicators such as MACD and Slow Stochastics have only started to turn higher.

Given the backdrop for the US Dollar, whereby the path of least resistance is lower in the DXY Index, it would stand to reason that without a firm dovish tone by the ECB today, EUR/USD seems more likely to naturally test the topside of its key reversal range near 1.2559 over the coming sessions than the support near 1.2155.

Price Chart 2: EUR/GBP Daily Timeframe (August 2017 to March 2018)

Euro Turns to ECB for Directional Cues: EUR/GBP, EUR/USD in Ranges

EUR/GBP's slight descending channel since September 2017 has been on our radar for some time, even as price action flattened out to carve out a more sideways trend since December. However, in recent days, with price holding above the daily 8-, 13-, and 21-EMAs, and with both MACD and Slow Stochastics pointing higher, we've seen EUR/GBP put in a test of both the sideways range and descending channel resistance between 0.8929 and 0.8968.

Traders should be on alert for a breakout opportunity to the topside in the event that Draghi & co fail to talk down the exchange rate; although given where highs in EUR/GBP have appeared over the past six months, it would seem unlikely that gains would have an easy time making their way much higher than 0.9045 in the near-term. A failure by EUR/GBP to breakout today would go hand-in-hand with EUR/USD tilting back towards its key reversal range support near 1.2155.

Read more: US Dollar Back in Downtrend as Trade War Rhetoric Intensifies

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com.

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