Talking Points:

- The European Central Bank announced that bond purchases will be reduced to €30 Billion-per-month beginning in January of 2018, and will run until September of next year.

- The ECB also said that rates will stay at present levels for an extended period of time

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This morning’s ECB rate decision was without significant fanfare. This comes despite the excitement that was seemingly building throughout much of the year as market participants prepared to finally hear how the European Central Bank might move away from their gargantuan stimulus program. As growth and inflation have begun to show with more stability throughout the bloc, we even saw rate expectations starting to price in hikes for 2018. To be sure, these weren’t exactly ebullient expectations; but the simple fact that rate hikes were entering the conversation was emblematic of the shift that had started to show within the European economy.

At this morning’s ECB rate decision, the bank was unprepared to leave stimulus behind, or to even plan for such a scenario. The ECB announced that they were going to extend the bond buying program beyond its prior end date of December, 2017. The extension will run from January of 2018 to September, and the amount of monthly bond buys will be halved to €30 Billion per month from the current €60 Billion. But perhaps more surprising to markets was the ECB’s statement on rates, as the bank left all three key rates unchanged. The ECB also said that rates will remain at present levels for an extended period of time.

This is yet another dovish outlay from the bank, as much of the year has seen divergence between market expectations, spot rates and the stance of the ECB. The bigger question is whether this dampening of expectations around potential rate hikes might allow for a deeper retracement in the Euro. As the Fed lays the groundwork to hike in December while saying that they’re looking at three more in 2018, this can expose the bullish trend in EUR/USD that’s built on the basis of shifting rate expectations, with markets attempting to pre-empt or get in-front of any potential tightening from the ECB.

The initial response after the ECB released their statement was a move-lower in the Euro. EUR/USD moved down to an area of support that’s held the lows in the pair over the past week and a half. This is the 23.6% retracement of the recent pullback in the pair and, at least so far, we’re seeing buyers step-in to hold the lows.

EUR/USD Four-Hour: Revisit to Prior Support After ECB Statement Released

EUR/USD Revisits Support After ECB Reduces, Extends QE

Chart prepared by James Stanley

The area around those recent swing-lows is relevant on longer-term charts of EUR/USD. We’ve been following a zone that runs from 1.1685-1.1736 as each of those prices are populated by longer-term Fibonacci retracements. But, more important than the theoretical is the actual, which is the fact that this zone of support has held the lows in the pair for the past three months.

EUR/USD Daily: Long-Term Support Zone Holds August-October Lows

EUR/USD Revisits Support After ECB Reduces, Extends QE

Chart prepared by James Stanley

The U.S. Dollar is Now Testing a Huge Zone of Resistance

Earlier in the week we looked at a huge zone of resistance in the U.S. Dollar that’s held the highs in the pair over the past few months. The zone runs from 94.08-94.30, and on multiple occasions has reversed upward advances in the U.S. Dollar; most recently on October 6th around that really abysmal NFP report that we received earlier in the month.

But – DXY is heavily allocated towards the Euro, with a greater than 57% clip of the single currency in the DXY Dollar index. This move of Euro weakness has brought upon a corresponding move of USD-strength, and we’re now re-entering that resistance zone that’s been rigidly strong over the past three months.

U.S. Dollar via ‘DXY’ Four-Hour: Bullish Channel Meets Longer-Term Resistance 94.08-94.30

EUR/USD Revisits Support After ECB Reduces, Extends QE

Chart prepared by James Stanley

Is a Deeper Move of U.S. Dollar Strength on the Horizon?

While the Dollar has been crushed for most of 2017, the past three months have shown a potential bottoming pattern. The case can even be made for a building inverse head and shoulders pattern on the daily chart of the U.S. Dollar, with the top-end of our resistance zone at 94.30 constituting the neck-line of the potential pattern.

U.S. Dollar via ‘DXY’ Daily: Potential Inverse Head & Shoulders Highlight Importance of 94.30

EUR/USD Revisits Support After ECB Reduces, Extends QE

Chart prepared by James Stanley

If we do see 94.30 taken-out in DXY, this could spell a deeper move in that bullish trend that’s been so prominent in EUR/USD throughout the year. Given that we’ve only seen a mere 23.6% of that trend retraced thus far, this can suggest a deeper retracement may be in order before the longer-term bullish theme is ready to continue. On the chart below, we’re looking at potential levels with which the Euro could pull back to, based on the Fibonacci retracement drawn around the 2017 bullish move in the pair.

EUR/USD Daily: 2017 Bullish Trend Remains Intact, Potential Pullback levels Applied

EUR/USD Revisits Support After ECB Reduces, Extends QE

Chart prepared by James Stanley

--- Written by James Stanley, Strategist for DailyFX.com

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