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EUR/USD Holds Resistance on No-Change ECB: Focus Moves to Inflation

EUR/USD Holds Resistance on No-Change ECB: Focus Moves to Inflation

2018-07-26 13:08:00
James Stanley, Strategist
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Talking Points:

- The ECB posed no changes to policy and made only minor alterations to the accompanying statement at this morning’s ECB rate decision, and this puts the focus squarely on next week’s inflation prints out of the Euro-Zone for clues to the next directional movement in the single currency.

- Inflation has been on a strong trend lately, coming in at 1.9% in the month of May and this was followed by a 2% print in June. With inflation already at the ECB’s target, will they be able to stay loose and passive with rates ‘at least through the summer of 2019?’ Last year saw a build of strength in EUR/USD on the basis of data pushing the ECB into a more-hawkish stance – will the second-half of 2018 see the return of the same theme?

- DailyFX Forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

Do you want to see how retail traders are currently trading the US Dollar? Check out our IG Client Sentiment Indicator.

EUR/USD Holds at Resistance as ECB Makes No Material Changes to Policy, Statement

This morning’s ECB rate decision has been without significant fanfare. The bank reiterated their stance that they’re anticipating keeping rates at current levels ‘at least through summer of 2019,’ while also confirming their earlier strategy to taper bond purchases by the end of the year, beginning in September. This brought upon a minor move in EUR/USD as the currency remains in the symmetrical wedge pattern that’s been building for the entirety of Q3.

EUR/USD Four-Hour Price Chart: Holds Resistance, Poses Minor Move on No-Change ECB

eurusd eur/usd four hour price chart

Chart prepared by James Stanley

Euro-Zone Inflation to be Released on Tuesday

Shortly after the ECB’s rate decision in June, Euro-Zone inflation for the month of June was released at a 2% print – right at the ECB’s target for inflation. This was an improvement on the prior month’s jump up to 1.9%, and this is starting to show a trend with European inflation. This topside trend to European inflation started to drive the thought that the ECB may have to hike ahead of the previous Q4, 2019 estimation, and there was the slight chance that the bank may acknowledge as such at this morning’s rate decision.

That did not happen, as the ECB made minimal changes to last month’s statement, and this puts focus squarely on next week’s Euro-Zone inflation numbers. This makes next week’s data outlay even more interesting, as we also have rate decisions from the Bank of Japan, the Federal Reserve and the Bank of England.

Euro-Zone Inflation Highlights of Next Week’s European Economic Calendar

DailyFX Economic Calendar - High-Impact Euro Events for Week of July 30, 2018

Chart prepared by James Stanley

Regarding inflation, we go into next week’s CPI numbers after a boost from the prior two months. If we do see continued strength here, this could bring back bullish price action in the single currency, much like we saw for the bulk of 2017 trade. The ECB remained dovish and passive throughout last year, but that didn’t stop markets and investors from pushing the Euro higher in anticipation of a hawkish shift at the Central Bank.

Euro-Zone Headline Inflation at the ECB’s 2% Target in June: Will July Continue the Trend?

Euro-Zone Inflation Since June, 2017

Chart prepared by James Stanley

Longer-Term EUR/USD

That wedge that’s been building in EUR/USD over the past couple of months comes after an aggressive bearish move that showed in Q2. That bearish move was driven by a combination of factors: It got started around the April ECB rate decision, and caught an aggressive gust of selling in May as European politics became a headline risk once again. The pair established a bottom in the waning days of May at 1.1509, and this is the time that rumors began to circulate that the ECB would announce options around stimulus-taper at their upcoming rate decision in June.

The prevailing thought there was that stimulus-taper would soon lead to higher rates; but when we got to the actual announcement, the ECB effectively divorced the themes of stimulus-taper and higher rates by saying that, while they’re planning on tapering stimulus in 2018, they’re also not planning on adjusting rates for at least 15 months. This functioned as a bearish driver for the currency, and EUR/USD made a fast move right back down to that 1.1509 low. But – just as we saw in May, sellers dried up and prices started to bounce as the pair was unable to encroach upon the 1.1500 psychological level.

Since then, it’s been higher-lows coupled with lower-highs as the pair has traded deeper into the symmetrical wedge/triangle pattern that’s been building for the entirety of Q3.

EUR/USD Daily Price Chart: Q2 Down-Trend Finds Support, Digests Move as Markets Await Next Driver

eur/usd eurusd daily price chart

Chart prepared by James Stanley

At this stage, traders looking at longer-term or position-based stances will likely want to wait for resolution of the past month’s chop before looking to pick a side. Support is fairly well-defined around 1.1509, while resistance from the June swing-high around 1.1852 could be looked at as longer-term resistance. A breach through either of those levels can open the door to trend-based continuation strategies as we move deeper into the second-half of the year.

EUR/USD Daily Price Chart: Resolution of Digestion to Open Door to Longer-Term Trend Strategies

eur/usd eurusd daily price chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q1 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers a plethora of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

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

Contact and follow James on Twitter: @JStanleyFX

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

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