Euro, Pound Primed for a Big Thursday on the Economic Calendar

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Talking Points:

– Tomorrow’s economic calendar has three key releases as we start with a Bank of England rate decision at 7:00 AM ET, and this is followed by an ECB rate decision at 7:45. The bank is widely-expected to begin tapering QE purchases at that meeting, and this will be spoken to during ECB President Mario Draghi’s accompanying press conference, set to start at 8:30 AM. Also at 8:30 AM, we’ll be getting August inflation numbers out of the United States, making for a potentially heavy outlay of volatility tomorrow morning.

– A number of FX themes remain of interest as we approach tomorrow’s drivers: The BoE rate decision may be obscured by Brexit dynamics, as headlines continue to push the Pound in either direction. Pivotal, however, will be the directional move in EUR/USD as this may finally help the US Dollar to break out of its recent impasse. The big question – which Dollar trend takes over? Do we see the 13-month down-trend from last year come back into the equation? Or will we see the two-month spurt of US Dollar strength that showed in April and May turn into something more?

– DailyFX Forecasts on a variety of currencies such as the US Dollar or the Euro are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

Do you want to see how retail traders are currently trading the US Dollar? Check out our IG Client Sentiment Indicator.

EUR/USD Holds Resistance Ahead of ECB

EUR/USD continues to hold resistance in the short-term descending triangle pattern that’s begun to build, and this keeps the pair in-focus ahead of tomorrow’s ECB meeting. That meeting is expected to bring the first actual steps towards tapering QE with the ECB set to wind down purchases by the end of the year. This theme was a seemingly positive driver throughout last year as markets tried to get in-front of what started to feel like an inevitable move away from stimulus. The thought being that the initial move away from ‘less loose’ policy would soon turn into ‘tighter policy’ as driven by rate hikes. And given that the Fed was already well-entrenched in their rising rate cycle and that the ECB hadn’t yet begun, there was simply more room to price in future rate hikes around the Euro-Zone; and this created a 12-month spate of strength in EUR/USD that lasted well into this year.

But when the ECB finally mentioned QE-exit in June of this year, they also said that they anticipate keeping rates at current levels ‘at least through the summer of 2019.’ This took that previously bullish theme of QE-exit and added questions as to whether the initial move away from less loose policy might soon bring higher rates. EUR/USD moved right back-down to the support around 1.1530 that had come into play in late-May; and the pair held that support for much of the next two months.

EUR/USD Daily Price Chart: 1.1530 Support, 1.1709-1.1750 Resistance

Euro, Pound Primed for a Big Thursday on the Economic Calendar

Chart prepared by James Stanley

In yesterday’s article, we asked the question: What else might Mr. Draghi be able to say to drive the single currency lower? Given a report that’s been circulating this morning, we may have just seen that hand beginning to play: Bloomberg News, citing an anonymous source, is reporting that the ECB is going to lower growth forecasts for the Euro-Zone on the basis of global trade tensions. The cuts would be slight and set to start this year. The report also stated that this may not be enough to move the ECB away from their plans to start tapering stimulus, but it does bring to question the possibility of rate hikes even after the summer of 2019.

The big question is how much motivation this might serve to bears. Given the setup that we looked at in FX Setups for The Week of September 10, 2018, the door could remain open to further losses as resistance has remained respected throughout this week. The descending triangle pattern that’s started to build will often be approached in a bearish manner, looking for the motivation that’s driven sellers in at lower-highs to carry through to a support break of the horizontal price that’s been holding the lows. That price that’s holding the lows over the past few weeks is the same 1.1530 level that’s been in play since late-May; so if support does get broken, this would be a huge level getting taken-out on a new driver around tomorrow’s ECB rate decision. This would also expose deeper support potential around 1.1448 and 1.1300.

EUR/USD Four-Hour Price Chart: Descending Triangle Builds Ahead of ECB

Euro, Pound Primed for a Big Thursday on the Economic Calendar

Chart prepared by James Stanley

The Other Side of the Argument: A Dovish ECB is Nothing New

At this point, we have to entertain the other side of the scenario, and that’s a potential for a move of strength in the Euro after tomorrow’s ECB outlay.

A dovish ECB is nothing new. The bank appeared reticent to tackle the topic of stimulus exit last year out of the apparent fear of additional gains in the Euro. And even when they did announce stimulus exit with a backdrop of Euro weakness in June, pushed by fears around an Italian debt stand-off, they did it in about the most dovish manner possible by also saying that they were anticipating rates staying at current levels ‘at least through the summer of 2019.’ Additional Euro strength could constrain inflation, and growth; thereby nullifying the very reason for looking at ‘less loose’ policy in the first place, so there’s a valid reason to expect the ECB to create a dovish backdrop.

The single currency had already been trending-higher through most of last year, so when we got to the October, 2017 ECB rate decision, the bank announced their intentions to extend stimulus into 2018. And this brought upon weakness – for all of about two weeks. In short order, bulls were back on the bid and prices were trending-higher.

So, while it appears as though Mr. Draghi and the ECB will attempt to take a dovish tilt to markets whilst announcing stimulus exit, it’s very possible for Euro strength to become the net result; and as we’ve been following, a bullish break above the resistance area that we’ve been following for the past month can close the door on the bearish trend while re-opening the possibility of longer-term Euro gains.

Pound Back to 1.3000 as Brexit Headlines Continue to Drive

Another day, another Brexit-driven move in GBP. Tomorrow brings a Bank of England rate decision with minimal expectations for anything to actually happen, so we very well may see a situation in which that rate decision is obscured by Brexit dynamics as traders attempt to position around the British Pound.

Our own Nick Cawley discussed the details of the most recent twist in this saga in his earlier piece entitled, GBPUSD Price Volatility Expected Ahead of Brexit Showdown. It appears as though we may be in for a leadership challenge for the PM spot of the UK as Hard-Line Brexiters don’t appear to be satisfied with Theresa May’s Chequers plan. This comes after what’s been a seemingly positive two-week period for the British Pound as prices have been moving higher as fears of Hard-Brexit or No-Deal Brexit have been diminishing; but should we face more intra-party dynamics from the Tories, that strength could reverse very quickly.

As we’ve been following, price action has started to take on a slightly bullish tone, largely from the fact that GBP/USD has halted the sell-offs that became commonplace this summer. It’s been far from a smooth ride, and as we discussed on Monday, a large portion of this topside push is likely emanating from short-cover after the aggressive four-month sell-off.

GBP/USD Weekly Price Chart: Declines Quelled at Fibonacci Support mid-August

Euro, Pound Primed for a Big Thursday on the Economic Calendar

Chart prepared by James Stanley

But this presents a fantastic opportunity for Cable bulls to show their hand. If we do see continued higher-low support as this negative pressure-point comes to light, that could be construed as a longer-term bullish theme that may not be directly related to prior shorts covering-up positions, as we’d be seeing an element of bullish defense of higher lows. We’re currently seeing that 1.3000 level helping to contain the sell-off, and below we look at deeper support structure in a zone that runs from 1.2918-1.2956, which we’ve been using in various forms over the past month.

GBP/USD Two-Hour Price Chart: Can a Short-Squeeze Turn into Full-Fledged Reversal?

Euro, Pound Primed for a Big Thursday on the Economic Calendar

Chart prepared by James Stanley

US Dollar Digestion of Digestion In-Focus Ahead of CPI

Not to get lost in the shuffle, a key inflation report is being released out of the United States at the same exact time that tomorrow’s ECB press conference begins. But – given the lack of punctuality from the ECB, that press conference will likely be starting a few minutes after the data is released. Nonetheless, this keeps the US Dollar and EUR/USD in the spotlight as we’ll be dealing with two high-impact drivers at the same time.

US Dollar Weekly Price Chart: 13 Months of Weakness, Two Months of Strength, Four Months of Grind

Euro, Pound Primed for a Big Thursday on the Economic Calendar

Chart prepared by James Stanley

In the United States, a September rate hike feels like a foregone conclusion: That rate decision is on the calendar for later in the month, taking place on September 25-26, and we’re currently seeing a 97% chance of a hike there; so it would probably be a far bigger disappointment if we don’t get a hike in two weeks. December, however, is a bit more questionable as we’re currently seeing an 81% probability of another 25 basis point move. Stronger CPI reads could nudge that higher, and this may bring on some US Dollar strength, although the question remains as to whether risk aversion or potential higher rates are the primary driver of USD strength at the moment. The earlier-month NFP report indicated robust wage growth, and if tomorrow’s CPI report continues with that theme of stronger inflation, we could see those December rate hike odds edge higher.

The expectation for tomorrow is a 2.8% print, which would be the first month of drawdown in CPI since November of last year.

US Inflation Growth Comes to Question With Tomorrow’s Expectation for 2.8%

Euro, Pound Primed for a Big Thursday on the Economic Calendar

Chart prepared by James Stanley

The big question around the US Dollar at the moment is whether this CPI release will drive price action, or whether we’ll see themes around the Euro or perhaps to a lesser degree, the British Pound, take over. As we discussed in yesterday’s webinar, we have a case of short-term digestion taking place at an area of longer-term digestion. This could furnish both bullish and bearish scenarios in the US Dollar, as we discussed yesterday. For now, the symmetrical formation that’s been building for the past few weeks remains.

US Dollar Four-Hour Price Chart: Digesting the Digestion

Euro, Pound Primed for a Big Thursday on the Economic Calendar

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts for Q3 have a section for each major currency, and we also offer a plethora of resources on USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

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