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Euro Forecast: ECB Minutes May Catalyze EUR/USD Capitulation

Euro Forecast: ECB Minutes May Catalyze EUR/USD Capitulation

2019-11-21 08:00:00
Dimitri Zabelin, Junior Currency Analyst
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EUR/USD, Euro, ECB – TALKING POINTS

  • ECB minutes may catalyze selloff in the Euro
  • EUR/USD may fail to break above resistance
  • Capitulation may precede aggressive decline

Learn how to use politicalrisk analysis in your trading strategy!

ASIA-Pacific Recap: Trade Woes Bruise Australian Dollar, Asian Equities

The Japanese Yen rose at the expense of the sentiment-linked Australian and New Zealand Dollars along with equity futures as US-China trade talks continue to break down. The congressional approval of the Hong Kong bill has strained diplomatic relations between Beijing and Washington as both sides attempt to ratify “phase 1” in their trade accord. Read more about the bill here.

AUD/JPY, NZD/USD, Nikkei 225 Futures, S&P 500 Futures

Chart showing AUD/JPY

AUD/JPY chart created using TradingView

How Will ECB Minutes Impact the Euro?

The Euro may undergo selling pressure if the minutes from the European Central Bank ‘s (ECB) October meeting carries overtly dovish undertones and prompts a selloff. As it so happens, EUR/USD has been sitting on the edge of key resistance at 1.1073 for three days. A lack of meaningful upside movement combined with the prospect of a Euro selloff may cause EUR/USD to capitulate and retest familiar support at 1.0989.

EUR/USD – Daily Chart

Chart showing EUR/USD

EUR/USD chart created using TradingView

While overnight index swaps are currently pricing in a less-than-even chance of a rate cut going all the way out to October 2020, chronic underperformance in economic data and tepid inflation over time may boost easing expectations. On a monthly timeframe, the 5Y5Y Euro inflation swap is still hovering at 1.2220, only slightly above the all-time low reading at 1.1688.

Chart showing EUR/USD

European policymakers not only have to worry about regional tribulations ranging from slower global growth to asymmetrical political shocks but also exogenous factors. The most notable is the US-China trade war which has been a leading factor behind global disinflationary pressure and the world-wide industrial contraction. These forces, combined with domestic struggles, may inflame ECB rate cut expectations.

The ECB’s financial stability report was recently released and highlighted a prolonged period of subdued growth alongside rising concerns about debt sustainability. Investors’ risk appetite – or lack thereof – can be most clearly seen by the volume of capital flowing into regional equities vs bonds, with the latter commanding a higher figure. In fact, the demand for safer assets is so high that investors are buying negative-yielding debt.

Looking ahead, Euro traders will continue to closely monitor the fundamental landscape in Europe against the backdrop of Brexit and the US-China trade war. ECB Executive Board Member Phillip Lane spoke yesterday and assured markets that policymakers do not see a recession in the Eurozone. However, price action suggests otherwise and in fact shows investors are losing confidence in the region’s economic growth trajectory.

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

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

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

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