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ECB Preview: EUR/USD Rally to Unravel on Wait-and-See Approach

ECB Preview: EUR/USD Rally to Unravel on Wait-and-See Approach

David Song, Strategist

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

- Will the Governing Council Start to Taper the Asset-Purchase Program?

- Join DailyFX Currency Analyst Christopher Vecchio LIVE to Cover the ECB Meeting.

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

ECB Interest Rate Decision

The European Central Bank (ECB) interest rate decision may initially trigger a bearish reaction in EUR/USD as President Mario Draghi and Co. are widely expected to retain the highly accommodative policy stance.

Why Is This Event Important:

With the ECB in no rush to remove the zero-interest rate policy (ZIRP), market participants are likely to pay increased attention to the forward-guidance as the quantitative easing (QE) program is set to expire in December, and the Euro stands at risk of giving back the advance from earlier this month should the central bank show a greater willingness to carry the non-standard measure into 2018.

Nevertheless, a more bullish scenario may unfold should the Governing Council adopt a hawkish tone and look to conclude its easing-cycle over the coming months. The ECB may start to taper the asset-purchase program as officials note the ‘very adverse scenarios for the inflation outlook had become less likely, in particular as deflation risks had largely vanished,’ and a further shift in the monetary policy outlook may fuel the adjustment in EUR/USD behavior especially as the pair quickly approaches the 2016-high (1.1616).

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

Period

Data Released

Estimate

Actual

Pips Change

(1 Hour post event )

Pips Change

(End of Day post event)

JUN

2017

06/08/2017 11:45:00 GMT

0.00%

0.00%

-18

-27

June 2017 European Central Bank (ECB) Interest Rate Decision

EUR/USD 5-Minute

EUR/USD Chart

DailyFX 3Q Forecasts Are Now Available

Even though the euro-area is now ‘projected to expand at a somewhat faster pace than previously expected,’ the European Central Bank (ECB) stuck to the sidelines in June, with officials largely endorsing a wait-and-see approach as ‘measures of underlying inflation remain low and have yet to show convincing signs of a pick-up.’ At the same time, the Governing Council appears to have put a floor on interest rates as ECB officials now ‘expect them to remain at their present levels for an extended period of time,’ and President Mario Draghi and Co. may continue to gradually change their tune over the coming months as ‘the risks surrounding the euro area growth outlook are considered to be broadly balanced.’ Nevertheless, the Euro struggled to hold its ground following the fresh developments, with EUR/USD closing the day at 1.1212.

How To Trade This Event Risk(Video)

Bearish EUR Trade: ECB Sticks to Current Script, Attempts to Buy More Time

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

Bullish EUR Trade: Governing Council Unveils Detailed Exit Strategy

  • Need a green, five-minute EUR/USD candle to favor a long Euro position.
  • Carry out the same setup as the bearish Euro setup, just in the opposite direction.

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • EUR/USD carves a bearish inside-day (harami) as it pulls back from a fresh 2017-high (1.1583), with the Relative Strength Index (RSI) showing signs of exhaustion as the momentum indicator deviates with price and struggles to push into overbought territory.
  • Failure to close above the 1.1580 (100% expansion) hurdle may generate a near-term pullback in EUR/USD, with a move below 1.1480 (78.6% expansion) opening up the 1.1400 (61.8% expansion) handle, followed by the Fibonacci overlap around 1.1330 (23.6% expansion) to 1.1350 (50% expansion).
  • Nevertheless, the broader outlook remains constructive amid the material shift in market behavior, with the break of the 2016-high (1.1616) opening up the next topside hurdle around 1.1670 (78.6% expansion).
  • Interim Resistance: 1.1616 (2016-high) to 1.1670 (78.6% expansion)
  • Interim Support: 1.0980 (50% retracement) to 1.1020 (50% expansion)

--- Written by David Song, Currency Analyst

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

To be added to David's e-mail distribution list, please follow this link

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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