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ECB Preview: QE Exit Strategy to Influence EUR/USD

ECB Preview: QE Exit Strategy to Influence EUR/USD

David Song, Strategist

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

- Will the ECB Retain the December Deadline for the QE Program?

- Sign up & Join DailyFX Currency Analyst Christopher Vecchio LIVE to Cover the ECB Rate Decision.

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

DailyFX Calendar

Even though the European Central Bank (ECB) remains in no rush to remove the zero-interest rate policy, the fresh updates from President Mario Draghi and Co. may heavily influence the near-term outlook for EUR/USD if the Governing Council unveils a detailed exit strategy.

With the quantitative easing (QE) program set to expire in December, a reduction from the current EUR 60B/month pace may prop up EUR/USD as the central bank start to move away from its easing-cycle. In turn, the Euro may exhibit a more bullish behavior going into the end of the month, but the single-currency stands at risk of facing a choppy reaction should the Governing Council vote in favor of carrying the asset-purchase program into 2018.

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)

SEP

2017

09/07/2017 11:45:00 GMT

0.00%

0.00%

+66

+47

September 2017 European Central Bank (ECB) Interest Rate Decision

EUR/USD 5-Minute Candle

EUR/USD Chart

The European Central Bank (ECB) stuck to sidelines in September, with President Mario Draghi and Co. reiterating that the asset-purchases ‘are intended to run until the end of December 2017, or beyond, if necessary.’ Nevertheless, the Governing Council noted that ‘this autumn we will decide on the calibration of our policy instruments beyond the end of the year,’ and it seems as though the central bank will start to wind down its quantitative easing (QE) program as officials contend that ‘the ongoing economic expansion provides confidence that inflation will gradually head to levels in line with our inflation aim.’ Despite the initial dip in EUR/USD, the Euro regained its footing following the press conference with President Draghi, with the pair climbing above the 1.2000 handle to end the day at 1.2023.

New to Forex? Get started with this Free Beginners Guide

How To Trade This Event Risk

Bullish EUR Trade: ECB Tapers QE, Unveils Exit Strategy

  • Need a green, five-minute candle following the decision/press conference to favor a long EUR/USD setup.
  • If market reaction favors a bullish Euro position, sell EUR/USD with two separate lots.
  • Set stop at the near-by swing low/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.

Bearish EUR Trade: Governing Council Extends QE Deadline

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

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Download our EUR/USD quarterly projections in our FREE DailyFX Trading Forecasts

  • Near-term outlook for EUR/USD remains capped by the 1.1860 (161.8% expansion) region, with support coming in around 1.1670 (50% retracement), which largely lines up with the monthly-low (1.1669).
  • Keep in mind, both price and the Relative Strength Index (RSI) continue to track the bearish formations carried over from August, with EUR/USD facing a growing risk for a near-term reversal as a head-and-shoulders formation appears to be taking shape.
  • With that said, a break/close below the 1.1670 (50% retracement) hurdle opens up the next downside region of interest around 1.1580 (100% expansion).
  • At the same time, a bullish reaction may negate the threat for a near-term reversal in EUR/USD, with a break/close above the 1.1860 (161.8% expansion) region raising the risk for a move back towards 1.1960 (38.2% retracement).
  • 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

See how shifts in EUR/USD retail positioning are impacting trend- Click here to learn more about sentiment!

Retail trader data shows 35.7% of traders are net-long EUR/USD with the ratio of traders short to long at 1.8 to 1.

The number of traders net-long is 14.2% lower than yesterday and 23.4% lower from last week, while the number of traders net-short is 1.2% higher than yesterday and 3.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bullish contrarian trading bias.

--- 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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