EUR/USD weakens ahead of ECB

The European Central Bank is widely expected to announce a plan to reduce the pace of its monthly asset purchases on Thursday.

The European Central Bank is widely expected to announce a plan to reduce the pace of its monthly asset purchases on Thursday. But at the same time, the ECB may also extend the duration of the QE programme so that it doesn’t spook the market and choke off economic growth. If this is the case, the central bank’s decision may therefore come across as neutral or dovish rather than hawkish. If so, this could weigh heavily on the euro in the short-term outlook.

So, the EUR/USD may be on the verge of a correction, particularly if the Fed-driven dollar simultaneously remains supported. Ahead of the ECB meeting on Thursday and tomorrow’s release of Eurozone Flash Services and Manufacturing PMIs, the EUR/USD has actually started the new week how it ended the last one: lower. The euro’s weakness may well be telling us that the market is positioning itself for a dovish ECB.

From a technical point of view, the EUR/USD remains in a range. Last week’s inside bar technical formation means there will be a pool of liquidity resting on either side of the 1.1730-1.1860 range.

With the ECB decision scheduled for Thursday, one potential scenario could be that price breaks below last week’s low at 1.1730 and probe liquidity below this level, before going back into the range and then take out resting liquidity above last week’s range at 1.1860.

But if there’s acceptance below last week’s low (should we get there) then the alternative scenario could be a week-long sell-off until price reaches the next levels of support at 1.1615, 1.1500 or even 1.1300.

Meanwhile any sustainable move above 1.1860 would put the bearish view to bed and potentially pave the way for a re-test of the psychological 1.20 handle or even the year 2012 low at 1.2040s, which was already tested a few times late in the summer. 

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.