This morning, FX traders woke up to reports that the European Central Bank (ECB) was reevaluating the parameters on its Pandemic Emergency Purchase Program (PEPP). Specifically, the central bank is considering further liberalizing its collateral rules to allow purchases of “below investment grade securities.”
For those of you who drifted off reading the last paragraph of central bank jargon, we can simplify it: The ECB is considering following the Federal Reserve and starting to buy so-called “junk” bonds to support the financial system.
This debate is especially timely because the ratings agency S&P will conclude its review of Italy’s sovereign debt later this week, while Moody’s will complete a similar review next month; the country is currently rated BBB at S&P (two steps above the investment-grade threshold) and Baa3 at Moody’s (just one step above the investment-grade threshold). If either of these entities downgrade Italy, it could cause the yields on BTPs to spike and put further stress on the entire concept of a unified continental currency à la the European debt crisis of 2010-2012.
Looking at the chart of the world’s most widely-traded currency pair, EUR/USD traders appear relatively unconcerned for now. As we go to press, EUR/USD is trading near the bottom of its 1-week range between 1.0810 and 1.0890, which is itself near the middle of the month-to-date range between about 1.0775 and 1.0990:
Source: TradingView, GAIN Capital
This range-within-a-range structure presents numerous trading opportunities for the coming days. Short-term traders who favor continue rangebound price action could look for opportunities to buy near the bottom of the 1-week range around 1.0810 and sell (or even flip to a short position) near the top at 1.0890.
Meanwhile, more momentum-focused traders may prefer to wait for a confirmed break beyond the internal range to set the stage for a possible continuation toward support or resistance from the longer-term range. For example, a rally above 1.0900 could pave the way for a continuation toward 1.0990, though traders would of course want to consider the risk-reward parameters of the setup in case we see another reversal.
One way or another, traders shouldn’t sleep on EUR/USD despite the recent lethargic trading conditions – major policy decisions are likely in the coming week, culminating in next Thursday’s ECB meeting!