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EUR/USD pauses for breath ahead of ECB

The economic calendar is taking a breather today but will return with bang tomorrow. Market participants are looking forward to two major central meetings as the Bank of Japan and especially the European Central Bank take centre stage. Investors will be wondering whether the ECB will once and for all make its intentions clear about what it will do with regards to QE in the coming months given the consistent but slow improvement in Eurozone data. On the one hand the ECB wouldn't want inflation in countries such as Germany and Spain to get out of control while on the other it wouldn't want to choke off growth at a time when things are picking up. It is a good problem to have, but it is a problem nonetheless. And then it has to consider the impact of a rising euro. The single currency has had a good year so far, not just against the US dollar but versus all of its other major rivals, including the pound, yen and commodity currencies. The ECB knows full well that if it turns hawkish now then the shared currency will most likely appreciate further, which is not good for Eurozone exports. The dilemmas it is facing means the ECB will have to make a decision soon. The more decisive, the more credible a central bank is considered to be. So if it is planning to taper QE at some point in the near future then it may as well make its intentions clear months ahead now so that the markets and businesses have plenty of time to adjust.

Ahead of the ECB meeting, euro traders are approaching things with a bit of caution today, apparently taking profit on their long positions with the EUR/USD and EUR/GBP both easing back a little. However it has been a minor retracement so far and I would not be surprised at all if the single currency were to turn positive again in the afternoon. But unless the ECB comes across as more dovish than expected, I can’t see the euro turning lower until at least it has probed liquidity above last year’s highs around 1.1615 area, possibly higher. At the start of this year when the EUR/USD tried to head below 2016 low, it was rejected immediately. Thus price is most likely to now test the resting liquidity above last year’s range. Depending on the level of demand there, or lack thereof, we can predict the euro’s next directional move with a higher degree of confidence. For example, a false break there would end the near-term bullish bias, while acceptance above last year’s high means we could head towards 1.20s next.

Meanwhile in near-term outlook, it is important that the buyers defend key support levels such as 1.1470-90, the most recent resistance area which gave way earlier this week. In fact this is where I am expecting to see a bounce from if the EUR/USD were to pullback that far. However if this week’s weekly low breaks at 1.1435 then this would invalidate the near-term bullish outlook. In this case, we may see a deeper retracement, possibly back towards the low 1.13s, or even lower. 

Source: eSignal and FOREX.com.

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