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EUR/USD May Be Surprised by More Dovish ECB

EUR/USD May Be Surprised by More Dovish ECB

2016-09-08 09:39:00
Oded Shimoni, Junior Currency Analyst
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Talking Points:

- EUR/USD trading higher, approaching the 1.13 handle

- Move higher comes ahead of the ECB, potentially hinting that the market is expecting a neutral tone

- Buyers might get squeezed on a more dovish sounding Draghi

The EUR/USD is trading higher, currently approaching the 1.13 handle, as the market trades in anticipation of the main event risk on the docket; the ECB Rate Decision.

The European Central Bank is expected to keep all rates unchanged, but opinions vary about other measures the bank might take, which could open the door for a dovish surprise.

Against this backdrop we will form our outlook and look to find short term trading opportunities using different tools such as the Grid Sight Index (GSI) indicator.

EUR/USD May Be Surprised by More Dovish ECB

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The European Central Bank Rate Decision is the main event risk on the docket, and will be accompanied by the usual Draghi Press Conference shortly after, but also new macroeconomic projections.

All those components should be treated for their potential implications.

Consensus forecasts see the ECB keeping all rates unchanged heading into today, but opinion varies on other factors.

The central bank's QE program is set to end in March 2017, and the bank could potentially introduce changes to the duration and composition of the program.

Extending the duration alone might be enough to see the Euro trade lower, but seems unlikely to have follow-through as the market generally accepts that part of policy will change soon, with the question being the timing.

If the price action in the EUR/USD is indicative, participants might be seeing risks skewed to the upside for this decision, potentially implying that buyers could be caught on the wrong side by other surprises from the central bank.

In comes the projections. A downgrade to the inflation outlook (which currently sits far lower than the bank’s target) seems likely to point at further easing down the line, which could weigh on the Euro.

The Draghi Speech will almost certainly see the ECB president touch upon the potential scarcity in assets that the central bank can purchase in the current program.

This could be the big market mover here. If Draghi surprises the market by announcing an expansion of eligible assets (like ETFs for example) or a change to the deposit rate floor (The ECB can only buy debt with a yield higher than the -0.4% deposit rate) the market seems likely to sell the Euro.

There is a case to be made for the ECB to move on this at the current meeting as the bank might face difficulties in the coming months with insufficient liquidity.

With volatility (both actual and implied) being so low, and the Euro trading mostly higher today versus other majors, conditions seem ripe for a significant move on any bearish surprise as participants scramble for cover.

EUR/USD Technical Levels:

EUR/USD May Be Surprised by More Dovish ECB

Click here for the DailyFX Support & Resistance tool

We use volatility measures as a way to better fit our strategy to market conditions. The EUR/USD is seeing subdued levels of volatility according to 20-day ATR measures, and options derived implied volatility measures are pointing to a market that expects a muted outcome (both in 1-week and 1-month implied volatility).

If this view is proven correct, macro levels seem likely to hold for range bound plays. But, as we mentioned, conditions seem fitting for the unexpected- potentially opening the door to momentum type plays following the events.

EUR/USD 30-Min Chart (With the GSI Indicator): September 8, 2016

EUR/USD May Be Surprised by More Dovish ECB

(Click to Enlarge)

The EUR/USD is trading at a potential short term resistance level at 1.1274, with GSI calculating slightly higher percentages of past movement to the upside in the short term.

The GSI indicator above calculates the distribution of past event outcomes given certain momentum patterns. By matching events in the past, GSI describes how often the price moved in a certain direction.

You can learn more about the GSI here.

Main levels of resistance heading into the ECB may be 1.1300, 1.1350, 1.1380 and 1.14.

Levels of support might be 1.1250, 1.1190, 1.1150 and 1.1100.

We generally want to see GSI with the historical patterns significantly shifted in one direction, which alongside a pre-determined bias and other technical tools could provide a solid trading idea that offer a proper way to define risk.

We studied over 43 million real trades and found that traders who successfully define risk were three times more likely to turn a profit.

Read more on the Traits of Successful Traders” research.

Meanwhile, the DailyFX Speculative Sentiment Index (SSI) is showing that about 36.5% of traders are long the EUR/USD at the time of writing, offering a long bias on a contrarian basis. With that said, range bound trading conditions are associated with retail traders more successful periods (see Traits of Successful Traders” research for more details).

You can find more info about the DailyFX SSI indicator here

--- Written by Oded Shimoni, Junior Currency Analyst for DailyFX.com

To contact Oded Shimoni, e-mail oshimoni@dailyfx.com

Follow him on Twitter at @OdedShimoni

https://www.fxcmapps.com/apps/grid-sight-index/?utm_source=DailyFX&utm_medium=Shimoni&utm_campaign=Article

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

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