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Bearish EUR/USD Outlook Favored Ahead of ECB as RSI Holds in Oversold

Bearish EUR/USD Outlook Favored Ahead of ECB as RSI Holds in Oversold

David Song, Shuyang Ren,


- European Central Bank (ECB) Widely Expected to Announce Quantitative Easing (QE) Program.

- Will ECB Share the Risk & Get Local Central Banks Involved?

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NOTE: FXCM Inc, Parent Company of DailyFX, will raise margin requirements given volatility risk.

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

EUR/USD may face fresh monthly lows over the next 24-hours of trade as the European Central Bank (ECB) is widely expected to announce more non-standard measures to further mitigate the risk for deflation.

What’s Expected:


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Why Is This Event Important:

Despite headlines for a EUR 50B/month asset-purchase program, the details surrounding the new initiative may play a greater role in driving EUR/USD especially as the Governing Council struggles to achieve its one and only mandate for price stability.

Expectations: Bearish Argument/Scenario

Producer Price Index (YoY) (NOV)-1.4%-1.6%
Consumer Price Index (YoY) (DEC A)-0.1%-0.2%
Purchasing Manager Index Composite (DEC F)51.751.4

Indeed, the heightening risk for deflation may prompt the ECB to further embark on its easing cycle, and the central bank may keep the door open to implement additional monetary support over the near to medium-term in an effort to encourage a more sustainable recovery.

Risk: Bullish Argument/Scenario

ZEW Survey (JAN)--45.2
Retail Sales (MoM) (NOV)0.2%0.6%
Sentix Investor Confidence (JAN)-1.00.9

However, the ECB may provide limited details and make an attempt to buy more time as President Mario Draghi struggles to produce a unanimous vote within the Governing Council, and we may see a more meaningful rebound in EUR/USD should the central bank disappoint.

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How To Trade This Event Risk(Video)

Bearish EUR Trade: ECB Unveils Open-Ended QE Program

  • Need red, five-minute candle following the policy announcement 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 Attempts 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:

ECB Rumor Puts EUR/USD on the Rocks, >100-pip Range After US Open

T-Minus 1: Setting EUR Expectations for Tomorrow’s ECB Meeting

Potential Price Targets For The Release


EUR/USD Daily Chart

Chart - Created Using FXCM Marketscope 2.0

  • Despite the string of closing prices above the 1.1500 handle, downside targets remain favored for EUR/USD as the RSI retains the bearish momentum and holds in oversold territory.
  • Interim Resistance: 1.1720 (23.6% retracement) to 1.1740 (161.8% expansion)
  • Interim Support: 1.1458 (January low) to 1.1500 pivot

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

PeriodData ReleasedEstimateActualPips ChangePips Change
DEC 201412/04/2014 12:45 GMT0.05%0.05%+41+65

December 2014 European Central Bank Interest Rate Decision

As expected, the European Central Bank (ECB) kept the benchmark rate at the record low of 0.05%, but announced it would consider a broad-based asset purchase program which could including sovereign debt next month in order to achieve a EUR 1T expansion in its balance sheet. At the same time, the ECB also lowered its economic outlook of the euro-area, with the central bank lowering its 2014/2015 forecasts for growth and inflation. Despite the dovish remarks, the Euro strengthened after the statement as the ECB further delays the QE program, with EUR/USD closing the day at 1.2376.

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

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