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Bearish EUR/USD Outlook Vulnerable If ECB Attempts to Buy Time

Bearish EUR/USD Outlook Vulnerable If ECB Attempts to Buy Time

2014-10-02 07:00:00
David Song, Shuyang Ren,
Share:

- European Central Bank (ECB) to Announce Further Details Surrounding Non-Standard Measures.

- Will ECB President Mario Draghi Talk Down the Euro?

For more updates, sign up for David's e-mail distribution list.

Trading the News: European Central Bank (ECB) Interest Rate Decision

Further details surrounding the European Central Bank’s (ECB) asset-back securities (ABS) and covered-bond purchase program may heighten the bearish sentiment surrounding the Euro, but we may see a relief rally in the EUR/USD should the Governing Council use the interest rate decision as an attempt to buy more time.

What’s Expected:

EUR/USD ECB

Click Here for the DailyFX Calendar

Why Is This Event Important:

The ECB may refrain from addressing the unanswered questions surrounding the non-standard measures as President Mario Draghi waits for the results of the second targeted long-term refinancing operation (T-LTRO), and the EUR/USD may face a near-term correction should the fresh developments dampen bets for more easing.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Consumer Price Index Core (YoY) (SEP A)

0.9%

0.7%

Markit Purchasing Manager Index Composite (SEP P)

52.5

52.3

Gross Domestic Product (2Q A)

0.1%

0.0%

The ECB may sound increasingly dovish amid the growth threat for deflation, and the EUR/USD may face a further decline should the council keep the door open for more non-standard measures, which may quantitative easing (QE).

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Employment (QoQ) (2Q)

--

0.2%

Industrial Production s.a. (MoM) (JUL)

0.7%

1.0%

Household Consumption (QoQ) (2Q)

0.4%

-0.3%

Nevertheless, the ECB may scale back its dovish outlook amid the improvements in the monetary union, and the Euro may face a near-term bounce should the central bank adopt a wait-and-see approach.

Join DailyFX on Demand to Cover the Entire ECB Rate Decision!

How To Trade This Event Risk(Video)

Bearish EUR Trade: ECB Keeps Door Open for More Non-Standard Measures

  • Need red, five-minute candle following the updated foreward-guidance to consider a short EUR/USD trade
  • If market reaction favors a short Euro trade, sell EUR/USD with two separate position
  • Set stop at the near-by swing high/reasonable distance from cost; at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is met, set reasonable limit

Bullish EUR Trade: Governing Council Tries to Buy More Time

  • Need green, five-minute candle to favor a long EUR/USD trade
  • Implement same strategy as the bearish euro trade, just in the opposite direction

Read More:

Scalping the AUDCHF Reversal- 8360 Resistance in Focus

COT: US Dollar Speculator Long Position is Largest on Record

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • DailyFX Speculative Sentiment Index (SSI) shows retail crowd remains net-short the dollar, with the EUR/USD ratio current sitting at +1.34.
  • Interim Resistance: 1.3010 (50.0% retracement) to 1.3020 (23.6% expansion)
  • Interim Support: 1.2450 (78.6% retracement) to 1.2500 pivot

Impact that the ECB rate decision has had on EUR/USD during the last meeting

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

SEP 2014

09/04/2014 11:45 GMT

0.15%

0.05%

-107

-197

September 2014 European Central Bank Interest Rate Decision

EUR/USD Chart

The European Central Bank unexpectedly cut the benchmark interest rate to fresh record low of 0.05% as the downside risks surrounding the growth outlook raises the threat for deflation. The Governing Council also laid out an asset-backed securities (ABS) purchasing plan to further boost private-sector lending, with details to be disclosed at the October 2 policy meeting. As a result, it seems as though the Euro will face additional headwinds over the near to medium-term as the ECB continues to push monetary policy into unchartered territory. The EUR/USD plummeted following the new wave of monetary support, with the pair dropping over 100 pips during the North American trade, but we saw a minor bounce going in the close as the euro-dollar ended the day at 1.2932.

--- Written by David Song, Currency Analyst and Shuyang Ren

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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