Will ECB Drag EUR/USD lower?

I am trying to think how and why the European Central Bank or its President Mario Draghi might want to give the euro a boost today and can’t find one good reason. I think Draghi will give very little information in the way of forward guidance. But overall he is more likely to come across as being slightly more dovish than slightly more hawkish for a variety of reasons – not least this week’s disappointing manufacturing PMI data from the Eurozone. But we have also seen a stock market correction owing in part to ongoing trade tensions, Brexit stalemate and of course the stand-off between Italy and the EU regarding the former’s budget. That being said, Draghi is unlikely – at least at this stage – to push back rate hike expectations. He is likely to re-iterate that QE will end this year and interest rates will be tightened after the next summer. So the EUR/USD is likely to remain under pressure, we think.

Ahead of the ECB, the EUR/USD is currently down for two consecutive weeks and is also negative on the month. So clearly, the trend is bearish. But it is still holding above that 1.13 handle, which has been a long-term support and resistance level in the past. This level provided good support back in August, so the liquidity that would be resting below it would now be an obvious target for the bears. Another interesting level on the downside to watch is at 1.1350/5, which was the high of the hammer candle that was formed when the EUR/USD rebounded from the August low and this level has not been re-tested on the daily time frame. But will price get to these levels today? Well, it is almost entirely dependent on the outcome of the ECB. If Mario Draghi happened to be more dovish than expected then this should be euro negative and so the EUR/USD could head further lower. Otherwise, we could see an oversold bounce – particularly because some market participants have presumably pre-empted a dovish ECB which is why the EUR/USD and other euro crosses have been weakening of late. Meanwhile, key short-term resistance is now at 1.1430-40 area, which had been support until yesterday’s breakdown. Thus, a closing break back above this level would be a bullish short-term development, as it would indicated the sellers who entered following yesterday’s breakdown are trapped.

Source: TradingView and FOREX.com

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