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ECB Preview: EUR/USD Recovery Vulnerable to QE Extension/Adjustment

ECB Preview: EUR/USD Recovery Vulnerable to QE Extension/Adjustment

2016-12-08 07:00:00
David Song, Strategist
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- European Central Bank (ECB) to Retain Zero-Interest Rate Policy (ZIRP), QE Program.

- Will the Governing Council Extend/Adjust the Asset-Purchase Program?

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

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

According to a Bloomberg News survey, all of the 58 economists polled forecast the European Central Bank (ECB) to preserve the zero-interest rate policy (ZIRP) in December, but the last interest rate decision for 2016 may shake up the euro-dollar exchange rate as President Mario Draghi and Co. appear to be on course to implement a more accommodative stance.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

With the ECB talking down concerns for an abrupt end to the quantitative-easing (QE) program, there’s growing speculation the Governing Council will extend the deadline for its non-standard measure beyond March 2017, and the central bank may also adjust the guidelines for its asset-purchase program in an effort to ‘secure a sustained convergence of inflation towards levels below, but close to, 2% over the medium term.’ However, more of the same from the ECB may spark a choppy reaction in EUR/USD as it paves the way for a ‘taper-tantrum,’ and the single-currency may stage a larger recovery going into the end of the year should the central bank merely attempt to buy more time.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Sentix Investor Confidence (DEC)

14.3

10.0

M3 Money Supply (YoY) (OCT)

5.0%

4.4%

Construction Output (MoM) (SEP)

--

-0.9%

The ECB may fine-tune its non-standard measures in an effort to boost confidence and further support lending to small and medium-sized enterprises (SME), and a move to further expand the central bank’s balance sheet may drag on EUR/USD especially as the Federal Reserve appears to be on course to deliver a December rate-hike.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Gross Domestic Product s.a. (YoY) (3Q F)

1.6%

1.7%

Unemployment Rate (OCT)

10.0%

9.8%

Consumer Price Index Core (YoY) (NOV A)

0.8%

0.8%

Nevertheless, sticky price growth accompanied by signs of a stronger-than-expected recovery may keep the Governing Council on the sidelines, and the wait-and-see approach may trigger a bullish reaction in the single-currency as market participants scale back bets for additional monetary support.

For More Updates, Join DailyFX Currency Analyst David Song for LIVE Analysis!

How To Trade This Event Risk(Video)

Bearish EUR Trade: ECB Extends/Adjusts Asset-Purchase Program

  • Need red, five-minute candle following the policy statement to consider a short EUR/USD trade.
  • If market reaction favors a bearish Euro trade, sell EUR/USD with two separate position.
  • Set stop at the near-by swing high/reasonable distance from cost; need 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 Continues to Endorse Wait-and-See Approach

  • 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.

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • Failure to break/close below the 1.0500 handle may foster a larger relief rally in EUR/USD, but the near-term ascending channel formation appears to be a continuation of a bear-flag formation, with the broader outlook tilted to the downside as price & the Relative Strength Index (RSI) preserve the bearish trends carried over from earlier this year.
  • Interim Resistance: 1.0780 (100% expansion) to 1.0800 (23.6% retracement)
  • Interim Support: 1.0500 (50% expansion) to 1.0517 (December 2015-low)

Check out the short-term technical levels that matter for EUR/USD heading into the meeting!

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)

OCT

2016

10/20/2016 11:45 & 12:30 GMT

0.00%

0.00%

+29

-58

October 2016 European Central Bank Interest Rate Decision

EUR/USD 5-Minute

EUR/USD Chart

As expected, the European Central Bank (ECB) retained the current stance in October and largely endorsed a wait-and-see approach for monetary policy as the Governing Council continues to implement as well as monitor the non-standard measures. Even though ECB anticipates inflation to pick up over the policy horizon, it seems as though the central bank remains on course to preserve the highly accommodative policy stance for an extended period of time as President Mario Draghi talks down the risk for a taper-tantrum and reiterates the quantitative-easing ‘programme is meant to run to the end of March 2017 or beyond if necessary.’ The Euro struggled to hold its ground as the ECB kept the door open to further embark on the easing-cycle, with EUR/USD slipping below the 1.1000 handle to end the day at 1.0928.

Get our top trading opportunities of 2016 HERE

Read More:

AUD/USD Recovery Hinges on RBA, 3Q GDP; Rally at Risk Sub-7600

S&P 500: Will the Market Respect Support This Week?

Technical Focus: Bond Yields - That was Fast!

New Zealand Dollar Clobbered as PM Key Steps Down

--- Written by David Song, Currency Analyst

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

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