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Trade the News: EUR Downside in Focus as ECB Meets

Trade the News: EUR Downside in Focus as ECB Meets

Martin Essex, MSTA, Analyst

EUR TALKING POINTS:

- Traders in EURUSD are currently focusing on the USD side of the equation, with rising US bond yields pointing to more US rate increases and therefore a stronger Dollar.

- Meanwhile, the European Central Bank’s Governing Council will likely leave both monetary policy and its communication unchanged today, signaling that policy will remain loose for a long time to come.

- That favors further downside in the EURUSD pair, which is also looking technically weak.

TRADING THE NEWS: ECB MEETING

Euro-Zone economic calendar for April 26

Further losses for EURUSD are looking likely as the persistent rise in the yield on the benchmark 10-year US Treasury note to above the important 3% level brings into focus the likelihood of perhaps three more US interest rate increases this year and consequently a stronger Dollar.

Meanwhile, today’s meeting of the European Central Bank’s rate-setting Governing Council will likely end with no policy changes and no indication of when the ECB will end its asset-purchase program that keeps Euro-Zone monetary policy loose.

So while EURUSD has already fallen to its lowest level since March 1, that decline looks set to continue after the ECB meeting.

EURUSD PRICE CHART, DAILY TIMEFRAME (JANUARY 16 – APRIL 25, 2018)

Latest EUR/USD price chart

Chart by IG

For a longer-term prediction, take a look at our Q2 forecast for the Euro.

While the US economy is steaming ahead healthily – pointing to the need for higher US interest rates – recent economic data from the Euro-Zone has been relatively weak. Tuesday’s influential Ifo Business Climate Index for Germany in April came in at 102.1, below both the previous 103.2 and the predicted 102.8. The previous day’s purchasing managers’ index for the Euro-Zone manufacturing sector was also weaker than expected, although that was more than offset by a stronger service-sector PMI.

The ECB is therefore likely to opt for caution, playing it safe by leaving policy unchanged and dropping no hints of a tightening to come. It is still likely to “normalise” policy by ending its asset-purchase program in due course but for now a change in its dovish future guidance is most unlikely and, indeed, an extension of quantitative easing into the fourth quarter of the year remains possible.

Moreover, the economic slowdown was expected, underlining that there is no need for a change in either policy or guidance.

EURUSD LEVELS TO WATCH OUT FOR

So what are the key levels to look out for? As the chart above shows, EURUSD has broken down from a triangle pattern that has been in place for several weeks, and that is clearly a bearish development. The lower boundary of the triangle, that was support, seems now to be acting as resistance and only a decisive break above that trend line, currently at 1.2246, would turn the outlook more positive.

To the downside, the immediate target is the March 1 low at 1.2154 but if that breaks the pair could drop right down to the January 9/10/11 lows around 1.1920. Nearer-term, a decline to just below 1.21 is quite feasible after the ECB meeting.

Join DailyFX Analyst Nick Cawley for live coverage of the ECB decision. You can sign up for his webinar here

If you’d like to learn how to trade like an expert, you can read our guide to the Traits of Successful Traders. Some of the key lessons are:

- Successful traders cut losses, and let profits run,

- Successful traders use leverage effectively, and

- Successful traders trade at the right time of day.

For more help to trade profitably listen to our regular Trading Webinars.

--- Written by Martin Essex, Analyst and Editor

Feel free to contact me via the comments section below, via email at martin.essex@ig.com or on Twitter @MartinSEssex

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

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