EURUSD May Break Key Support if PMI Data Fuels ECB Rate Cut Bets

ECB RATE DECISION, EUROZONE,EURUSD – TALKING POINTS

• Eurozone PMI data may undershoot expectations, fuel ECB rate cut bets
• EURUSD as a result may puncture lower lip of critical support channel
• Traders may wait to commit capital before ECB rate decision, outlook

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EURUSD may fall if Eurozone PMI data misses estimates and fuels rate cut bet expectations ahead of the ECB rate decision this week. Economic data out of the Eurozone has been tending to underperform relative to economists’ expectations, with inflationary pressure remaining disappointingly tepid. A sour reading may lend credence to the notion that more accommodative policy may be required to boost economic activity.

The IMF’s recent publication of the updated economic outlook certainly supports the notion of the need for looser credit conditions. Following the release of the report, overnight index swaps showed a modest increase in ECB rate cut probabilities. However, given the scope and magnitude of the ECB rate decision, volatility may be relatively muted by traders’ hesitancy to enter a position prior to the central bank outcome.

CHART OF THE DAY: WILL PMI DATA CAUSE EURUSD CAPITULATION?

At the time of writing, the pair is sitting on the lower edge of the 18-month resistance-turned-support channel. The lack of follow through suggests traders may be hesitant to feel confident in a particular price direction prior to what could be trend-defining catalysts. Traders will likely find themselves waiting for the assurance of a daily close with follow through before entering a short position or increasing exposure.

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--- Written by Dimitri Zabelin, Jr Currency Analyst for DailyFX.com

To contact Dimitri, use the comments section below or @ZabelinDimitri on Twitter