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EUR/USD Outlook Hinges on Updated ECB Forecast, QE Program Deadline

EUR/USD Outlook Hinges on Updated ECB Forecast, QE Program Deadline

David Song, Strategist

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

- Will the Governing Council Stick to the December Deadline & Start to Taper the Asset-Purchase Program?

-Sign Up & Join DailyFX Market Analyst Martin Essex LIVE to Cover the ECB Meeting.

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

ECB Rate Decision

The initial reaction to the European Central Bank (ECB) interest rate decision may be limited as President Mario Draghi and Co. preserve the zero-interest rate policy (ZIRP), but the fresh updates coming out of the central bank may drag on EUR/USD if the Governing Council merely attempts to buy more time.

The ECB may largely endorse a wait-and-see approach as ‘measures of underlying inflation remain low and have yet to show convincing signs of a pick-up,’ and the Euro may face a bearish reaction should the central bank keep the door open to extend the quantitative easing (QE) program beyond the December deadline. On the other hand, the Governing Council may prepare European households and businesses for a less-accommodative stance as officials see ‘reflationary forces, which referred to the recovery of inflation from levels below its long-term trend, had replaced risks of deflation,’ and the shift in EUR/USD behavior may continue to unfold throughout the remainder of the year if the ECB shows a greater willingness to gradually move away from its easing-cycle.

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)

JUL

2017

07/20/2017 11:45:00 GMT

0.00%

0.00%

+66

+134

July 2017 European Central Bank (ECB) Interest Rate Decision

EUR/USD 15-Minute

EUR/USD Chart

The European Central Bank (ECB) stuck to the zero-interest rate policy (ZIRP) in July, but went onto say the Governing Council will decide the fate of the quantitative easing (QE) program in autumn as the non-standard measure is scheduled to end in December. The fresh remarks suggest President Mario Draghi and Co. will gradually move away from the easing-cycle as ‘the risks surrounding the euro area growth outlook are broadly balanced,’ and the ECB may continue to soften its dovish tone over the coming months as officials argue ‘reflation has replaced deflation.’ The Euro rallied following the ECB meeting, with EUR/USD clearing the 1.1500 handle to end the day at 1.1630.

How To Trade This Event Risk(Video)

Bearish EUR Trade: ECB Endorses Wait-and-See Approach

  • Need a red, five-minute candle following the press conference to favor a short EUR/USD trade.
  • If market reaction favors a bearish Euro setup, 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 Prepares to Taper QE Program

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

Potential Price Targets For The Release

EUR/USD Daily Chart

EUR/USD Daily Chart

Check out our EUR/USD quarterly projections in our FREE DailyFX Trading Forecasts

  • EUR/USD appears to be stuck in a near-term holding pattern as it pulls back from the 2017-high (1.2070), but the broader outlook remains constructive as a bull-flag formation pans out, with the pair filling the gap from January-2015 (1.2000 down to 1.1955).
  • The Relative Strength Index (RSI) highlights similar dynamic as it preserves the bullish formation carried over from late-2016, but the oscillator appears to be deviating with price as it struggles push into overbought territory.
  • Failure to test the 1.2130 (50% retracement) hurdle may spur a larger pullback in EUR/USD, with a move below the 1.1770 (100% expansion) region opening up the 1.1670 (50% retracement) support zone, which largely lines up with the August-low (1.1662).
  • Interim Resistance: 1.2320 (23.6% retracement) to 1.2370 (61.8% expansion)
  • Interim Support: 1.1390 (61.8% retracement) to 1.1400 (61.8% expansion)

EUR/USD Retail Sentiment

EUR/USD Retail Sentiment

Track Retail Sentiment with the New Gauge Developed by DailyFX Based on Trader Positioning

Retail trader data shows 29.3% of traders are net-long EUR/USD with the ratio of traders short to long at 2.42 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.08642; price has moved 9.7% higher since then. The number of traders net-long is 13.7% lower than yesterday and 2.2% lower from last week, while the number of traders net-short is 4.3% higher than yesterday and 1.6% lower from last week.

--- 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

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