Euro ahead of ECB

EurEURUSD has drifted below the 1.1050 mark so far today after rising during the latter part of last week, which left an 11-day high at 1.1084. Last Friday’s August US jobs report generated some chop, although the combination of a softer than anticipated job gain but otherwise strong report left markets without a strong sense of direction.

Fed Chair Powell left the door open to a 25 bp easing at the mid-September FOMC, but refrained from sounding too dovish, saying that the Fed will “act as appropriate” to sustain the now record-long expansion. Powell also said outlook is a “favorable” one, with the economy “in a good place” and is continuing to perform well with no recession in the forecast. This should keep the Dollar in demand on dips for now.

A big focus will be on Thursday’s ECB meeting, which comes with updated staff projections and is widely expected to see the ECB introduce further easing measures. The event risk is that the package of measures will fall short of what markets have been pricing in, because without regulatory changes there is limited room for government bond purchases to be extended significantly. There could be a foray into other asset classes on the QE front but the overall amount is likely to be relatively small for now. We are expecting a small 10 bp cut in the deposit rate to -0.50%, with a tiered system to limit the impact of negative rates.

As for EURUSD, overall a low-conviction bullish view is expected for the current week as the asset manage to hold Support  for a fourth day in a row above 1.1014. Resistance comes in at 1.1063-1.1068 (20-day SMA and yesterday’s peak). A decisive break through the 1.1014 level will alert the continuation of the downchannel since mid-June. 

In the near term though as sentiment has turned positive intraday, with momentum indicators above neutral zone, a break of immediate resistance could retest the 1.1095 (confluence of Thursday’s peak and 200-period in H4 chart) and the 1.1120 Resistance level (50-day EMA).

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Andria Pichidi

Market Analyst

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