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EUR/USD Rate Susceptible to Range Bound Prices Ahead of ECB Meeting

EUR/USD Rate Susceptible to Range Bound Prices Ahead of ECB Meeting

2020-01-20 06:00:00
David Song, Strategist
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EUR/USD Rate Talking Points

EUR/USD holds the monthly range ahead of the European Central Bank (ECB) interest rate decision, but the opening range for January raises the scope for a further decline in the exchange rate as the near-term correction fails to produce a test of the August high (1.1250).

EUR/USD Rate Susceptible to Range Bound Prices Ahead of ECB Meeting

EUR/USD bounces back after failing to clear the monthly low (1.1085) and the exchange rate may continue to consolidate over the coming days as the ECB is widely expected to retain the current policy at its first meeting for 2020.

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The ECB may largely reiterate the statement from the previous rate decision as the Governing Council conducts a strategic review for the first time since 2003, and President Christine Lagarde and Co. may merely attempt to buy time as the central bank expands its balance sheet by EUR 20B/month.

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More of the same from the ECB may keep EUR/USD afloat as the central bank appears to be in no rush to push the main refinance rate, the benchmark for borrowing costs, into negative territory, and the Governing Council may continue to call on European lawmakers to support the economy as officials argue that “governments with fiscal space should be ready to act in an effective and timely manner.”

However, the ECB may continue to endorse a dovish forward guidance as the Office of the US Trade Representative (USTR) insists that France’s Digital Services Tax is “unreasonable,” with the Trump administration looking to implement “additional duties of up to 100 percent on certain products of France.”

In turn, President Lagarde and Co. may emphasize that “the Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner” as the central bank struggles to achieve its one and only mandate for price stability.

The threat of a US-EU trade war may drag on the Euro as the ECB relies on non-standard measures to support the monetary union, and the opening range for 2020 raises the scope for a further decline in EUR/USD as the near-term correction in the exchange rate fails to produce a test of the August high (1.1250).

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • The broader outlook for EUR/USD remains tilted to the downside as the exchange rate clears the May-low (1.1107) following the Federal Reserve rate cut in July, with Euro Dollar trading to a fresh yearly-low (1.0879) in October.
  • Keep in mind, the monthly opening range has been a key dynamic for EUR/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 1, with monthly high for November occurring during the first full week of the month, while the low for December happened on the first day of the month.
  • As a result, the opening range for 2020 casts a bearish outlook for EUR/USD as the exchange rate pulls back from the December high (1.1239), and the correction from the 2019 low (1.0879) may continue to unravel amid the failed attempt to test the August high (1.1250).
  • Nevertheless, failure to clear the monthly low (1.1085) may generate range bound conditions, but lack of momentum to hold above the 1.1100 (78.6% expansion) handle may open up the 1.1040 (61.8% expansion) region, with the next area of interest coming in around 1.0950 (100% expansion) to 1.0980 (78.6% retracement), which lines up with the November low (1.0981).
  • Will keep a close eye on the Relative Strength Index (RSI) as it snaps the upward trend from November after failing to push into overbought territory.
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--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

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

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