ECB Preview: EUR/USD in for a rollercoaster ride

This week’s major macro event has finally arrived: the European Central Bank will announce its eagerly-anticipated monetary policy decision at 12:45 BST and President Mario Draghi will deliver the details at the ECB press conference which will start from 13:30. Many market observers expect the ECB to announce details on its Quantitative Easing exit plans, with key interest rates unlikely to be alternated at this meeting. The absence of guidance in previous meetings means there is scope for a few surprises, although many believe that QE will be slashed in half and so asset purchases will continue at ‘only’ €30 billion per month for at least another nine months, effective from January. This outcome is probably priced in, so anything else could send the euro and stock markets moving sharply in opposing directions – at least in the short-term anyway.

Given the euro’s ascend throughout this year, I believe Mario Draghi and co will want to come across as dovish as possible and will use any excuse to achieve that. Policy makers at the ECB will most likely point to the fact inflation is still soft and youth unemployment is high in a number of Eurozone countries, including Italy and Spain. One way to achieve a weaker euro could be if they decide to taper QE by on 10-15 billion euros per month, rather than 30. This could send the euro/U.S. dollar (EUR/USD) currency pair tumbling. Otherwise, I can’t see how the ECB might be able to prevent a more significant appreciation of the EUR/USD exchange rate. 

Ahead of the ECB’s monetary policy decision, European stock markets were calm after Wall Street had managed to trim its losses overnight, while the euro was holding steady above the $1.18 handle. As highlighted on the chart, the EUR/USD is currently stuck between two key long-term broken levels. The downside is supported by around 1.1710, the top of the prior range hit back in August 2015, while the upside is limited by 1.2040ish, which was a key support and the low back in July 2012. Everything else is just noise. Once move outside of this wide range will the EUR/USD’s near-term direction become clear again. But for day and swing traders, it will be worth keeping an eye on the diverging trend lines as a clean move could lead to a continuation in the direction of the break. So, the shorter-term support and resistance levels that we will need to break are at around 1.1730 and 1.1870 respectively.