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Jignesh Davda
EUR/USD

What to Expect from the ECB

The markets will be looking for a dovish stance from the ECB, following a shift that most central banks in developing countries have already made.

The view is not all that different compared to that ahead of the June ECB meeting. However, last month the central bank was not nearly as dovish as the markets had expected, sending EUR/USD sharply higher.

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Since then, communication from Draghi and other members have revealed that the central bank is indeed acknowledging the several risks that are presented to the European economy.

The markets now think that the ECB will ease policy, possible even at today’s meeting. The money markets are showing about a 50% chance of a 10 basis point cut later today. Those analysts that are not on board with a rate cut today are mostly expecting one in September.

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Prior Market reactions to ECB Meetings

ECB-July25

The above chart shows the daily change in EUR/USD on prior ECB days for the last year and a half. On average, EUR/USD has moved about 53 pips, which is not all that far off from the current daily ATR which is just below 50.

Keep in mind that this is measured from the daily open to close and intraday fluctuations can vary. For example, in June, the pair spiked to the 1.1200 handle following the rate statement but promptly reversed higher. In the reversal, the pair reached a high of 1.1309 and finally settled at 1.1275 for a daily gain of 55 pips.

There are a few things to keep in mind when considering average ranges. For starters, overnight implied volatility is at its highest this year. Also, the message delivered by the ECB will largely influence volatility.

I think the biggest risk to volatility is if the ECB is either much more hawkish or dovish than expected. For example, if they cut more than 10 basis points at today’s meeting. It doesn’t seem likely, but that is where the risk lies. On the other hand, If the ECB is not even looking at cutting rates, then EUR/USD stands to rally by a significantly greater amount than suggested by the above chart.

Aside from the interest rate, forward guidance regarding asset purchases will also be important. It doesn’t seem likely to me that they will announce anything new considering that they just announced TLTRO III at the last meeting, which is scheduled to start in September. It is possible, however, that they adjust the terms of the new TLTRO.

Technical Analysis

Considering the probability priced in by the markets of a rate cut, I think we may see a bulk of today’s reaction following the rate statement. This is unlike prior meetings where price action is mostly focused around the press conference.

If we push lower from here, I think it is inevitable that stops will get triggered below the 2019 low. This can trigger a volatile downside move. In such a scenario, I would be looking for a move to 1.1027.

EURUSD Daily Chart

In the event of a bullish reaction, there are a few levels on my watch list. The first falls at 1.1184. This is a level that held the pair higher in March and April and also triggered a reversal in the middle of June.

If we manage to get as high as 1.1265 on an intraday basis, I think it would offer a good short opportunity for scalpers. The level offers resistance and is significantly outside the normal range for ECB days.

Horizontal support at 1.1118 has held EUR/USD higher for the year thus far. As mentioned, if we get below it, I think we will see a jump in volatility. Ultimately, I think this level will be in the line in the sand for price action surrounding today’s ECB meeting.

Bottom Line

  • The ECB meeting can trigger a stop run below major support at 1.1118 if the central bank is a bit more dovish than expected.
  • If the rate statement does not reveal a cut, I would be looking for a quick jump higher to 1.1184.
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