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ECB Stimulus Talking Points:

  • With ECB President Mario Draghi talking up the possibility of more stimulus, the Euro is under renewed pressure across the board.
  • Ongoing deterioration in medium-term inflation expectations and soft growth momentum may necessitate further action before Draghi’s term ends on October 31, 2019.
  • Retail traders have shifted to buying Euros despite consistent losses over the past week.

See our long-term forecasts for the Euro and other major currencies with the DailyFX Trading Guides.

Just two weeks after the June European Central Bank meeting, ECB President Mario Draghi has spent part of his time at the ECB Forum on Central Banking in Sintra, Portugal talking up the possibility of more stimulus in the coming months.

The latest signal for a dovish turn by the ECB comes as other central banks, such as the Reserve Bank of Australia and the Reserve Bank of New Zealand, have already cut their main interest rates. Meanwhile, the Federal Reserve appears on the verge of starting its interest rate cut cycle in earnest when it announces the results of the June Fed meeting on Wednesday, June 19.

Draghi’s Comments a Change in Tone from the June ECB Meeting

The comments by ECB President Draghi today mark a departure of the patient, ‘wait-and-see’ approach prescribed at the start of the month. It was at the June ECB meeting that ECB President Draghi declared that he doesn’t “see any substantial worsening in outlook.” But now, “in the absence of improvement,” ECB President Draghi appears ready to act with “further cuts” to interest rates to support the near-term economic outlook.

While the comments from ECB President Draghi may have sparked the ire of US President Donald Trump in a series of tweets this morning, the central bank chief did say that “we have our remit, we have our mandatedefined as [targeting] a rate of inflation close but below 2 per cent over the medium termwe are ready to use all the instruments that are necessary to fulfil this mandate and we can’t target the exchange rate.”

Even if the Euro isn’t being directly targeted by ECB monetary policy, the indirect impact of the ECB’s latest dovish turn is that traders are driving EUR-crosses lower.

EURUSD Technical Analysis: Daily Price Chart (July 2018 to June 2019) (Chart 1)

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After appearing to start the process of bottoming out at the start of June, a clear lack of follow through to the topside in recent days has seen EURUSD prices lose significant technical support. The bullish piercing candle on June 6 constituted a near-term swing level of support, and a close back below said level at 1.1200 today would be a strong indication that further losses are due in the days ahead.

Momentum is quickly eroding for EURUSD, with price back below the daily 8-, 13-, and 21-EMA envelope, while both daily MACD and Slow Stochastics have started to turn lower (albeit only the latter is in bearish territory at this time). It’s possible that the coming days see EURUSD rates return to the bullish falling wedge pattern; if so, the odds of a reversal back to the yearly lows near 1.1110 would increase.

IG Client Sentiment Index: EURUSD Price Forecast (June 14, 2019) (Chart 2)

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EURUSD: Retail trader data shows 56.1% of traders are net-long with the ratio of traders long to short at 1.28 to 1. The number of traders net-long is 5.6% lower than yesterday and 23.9% higher from last week, while the number of traders net-short is 3.1% higher than yesterday and 22.6% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.

EURJPY Technical Analysis: Daily Price Chart (July 2018 to June 2019) (Chart 3)

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EURJPY rates are at a key decision area following ECB President Draghi’s comments on Tuesday. It was just last week that EURJPY prices closed above the daily 13- and 21-EMAs for the first time since April 23, breaking the descending trendline off the April and May swing highs in the process.

But the break of the descending trendline is now in question, with EURJPY rates having come back down to test the former resistance as support. The retest is taking place around 121.22, the bullish piercing candle low from June 6 (note: a key date for EURUSD as well: the day of the June ECB meeting). Beyond there, a return below the descending trendline off the April and May swing highs would be a strong indication that the yearly closing low of 120.92 would be in focus.

IG Client Sentiment Index: EURJPY Price Forecast (June 14, 2019) (Chart 4)

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EURJPY: Retail trader data shows 58.8% of traders are net-long with the ratio of traders long to short at 1.43 to 1. In fact, traders have remained net-long since Apr 25 when EURJPY traded near 126.556; price has moved 4.1% lower since then. The number of traders net-long is 8.6% lower than yesterday and 19.1% lower from last week, while the number of traders net-short is 17.3% lower than yesterday and 5.1% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURJPY prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURJPY-bearish contrarian trading bias.

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

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

To contact Christopher Vecchio, e-mail at cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

View our long-term forecasts with the DailyFX Trading Guides