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EUR/USD Recovery to Unravel as ECB  Combats ‘Taper Tantrum’

EUR/USD Recovery to Unravel as ECB Combats ‘Taper Tantrum’

2017-01-19 07:00:00
David Song, Strategist
Share:

- European Central Bank (ECB) to Preserve Zero-Interest Rate Policy (ZIRP), QE Program.

- Will the Governing Council Keep the Door Open to Further Embark on Its Easing-Cycle?

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

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

Even though the European Central Bank (ECB) is widely anticipated to retain the status quo at the first interest rate decision for 2017, the fresh rhetoric from President Mario Draghi and Co. may shake up the near-term outlook for EUR/USD especially as the Governing Council is on course to reduce the asset-purchase program starting in April.

What’s Expected:

DailyFX Calendar

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Why Is This Event Important:

With the ECB scheduled to narrow its asset-purchases to EUR 60B/month later this year, the Governing Council may adopt a more neutral tone and attempt to walk a fine line in an effort to stem the threat for a ‘taper tantrum.’ With that said, more of the same from ECB officials may generate a limited market reaction, but the Euro remains at risk of facing headwinds throughout 2017 as the central bank keeps the door open to further support the monetary union.

Expectations: Bearish Argument/Scenario

Release

Expected

Actual

Retail Sales (MoM) (NOV)

-0.4%

-0.4%

Economic Confidence (DEC)

106.8

107.8

Gross Fixed Capital (QoQ) (3Q)

0.4%

0.2%

The ongoing weakness in business investment paired with the slowdown in household consumption may encourage the ECB to endorse a dovish outlook for monetary policy, and the single-currency may struggle to preserve the rebound from earlier this month should the central bank show a greater willingness to retain the non-standard measures beyond December 2017.

Risk: Bullish Argument/Scenario

Release

Expected

Actual

Producer Price Index (YoY) (NOV)

-0.1%

0.1%

Consumer Price Index Core (YoY) (DEC A)

0.8%

0.9%

M3 Money Supply (YoY) (NOV)

4.4%

4.8%

Nevertheless, the pickup in private-sector lending paired with signs of stronger price growth may spark a rift within the ECB, and the central bank may tame expectations for additional monetary support amid the ballooning balance sheet.

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

How To Trade This Event Risk(Video)

Bearish EUR Trade: ECB Endorses Highly Accommodative Stance for 2017

  • Need red, five-minute candle following the rate decision 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; 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 Drops Dovish Tone, Promotes 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 reverse.

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • More of the same from the ECB may fuel the near-term recovery in EUR/USD as market participants scale back bets for additional monetary support, but the broader outlook remains tilted to the downside as the Federal Reserve appears to be on course to further normalize monetary policy in 2017; topside targets remain in focus for the near-term as the Relative Strength Index (RSI) preserves the bullish formation from November.
  • Interim Resistance: 1.0780 (100% expansion) to 1.0800 (23.6% retracement)
  • Interim Support: 1.0300 pivot and 1.0370 (38.2% expansion)

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)

DEC

2016

12/08/2016 11:45 & 12:30 GMT

0.00%

0.00%

-134

-185

December 2016 European Central Bank Interest Rate Decision

EUR/USD 5-Minute

EUR/USD Chart

The European Central Bank (ECB) increased its efforts to support the monetary union, with the Governing Council extending the deadline for the quantitative easing (QE) program to December 2017, but announced plans to curb its asset-purchase program over the coming months. The ECB noted that ‘from April 2017, the net asset purchases are intended to continue at a monthly pace of €60 billion until the end of December 2017, or beyond, if necessary,’ and President Mario Draghi may keep the door open to further embark on the easing-cycle as the central bank struggles to achieve the 2% target for inflation. The Euro struggled to hold its ground following the policy adjustments, with EUR/USD slipping below the 1.0700 handle to end the day at 1.0611.

If you’re looking for trading ideas, check out our Trading Guides.

Read More:

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Silver Price Resistance and Dollar Support Confluence

USD/CAD at Risk for Further Losses Sub-1.33

--- Written by David Song, Currency Analyst

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

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