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Jignesh Davda

How Aggressively Will the ECB Ease Today?

Pretty much every analyst out there is expecting the European Central Bank to ease monetary policy at their meeting later today. The question remains how much they will ease.

These are the main things I am looking for in the upcoming meeting.

  • Rate cut – although a cut of 10 basis points is expected, a larger 20 basis point cut cannot be ruled out.
  • Quantitative easing – Several of the big banks are looking for around 30 billion euros per month over the next year or so.
  • Forward guidance – The reference to keeping rates low “at least through the first half of 2020” is likely to be removed. As well, there might be downward revisions for inflation and growth expectations.

Simply put, the reaction in EUR/USD will be largely dependent on whether policymakers over-deliver or under-deliver.

One of the reasons why expectations have built for a fairly large stimulus package is low inflation levels. The consumer price index in the Eurozone hit a high of 2.2% in November last year but has moved steadily lower since. CPI rose just 1% in the year to July which reflected a two and a half year low. Even with aggressive easing, it might still take a significant amount of time to reach the near 2% target for inflation.


Technical Analysis

In yesterday’s forecast, I discussed the range playing out in EUR/USD between 1.1020 and 1.1060 and a potential range break. The pair did break lower but found some buyers after briefly dipping below the 1.1000 handle.

In today’s early day recovery, the pair has crossed above the 1.1020 breakdown point to signal that buyers are in control in the early day. However, the ECB meeting later today downplays the technical influence of the bullish break.

EURUSD 4-Hour Chart

The upside area to watch in the session ahead is in around the 1.1060 area. As mentioned, the level acted as resistance in a range that played out for a week. Slightly below it, the 100 moving average on a 4-hour chart and the 20-day moving average come into play. There is quite a bit of confluence in play in this area, an upside breach would be a strong bullish signal.

If the ECB is more dovish than expected, I would expect the pair to make a run at recent lows. The level I am watching in such a scenario is 1.0911.

Bottom Line

  • The ECB is expected to ease policy at today’s meeting. How much they ease will clarify the near-term trend for EUR/USD.
  • Major resistance for the session ahead comes in at 1.1060.
  • A dovish ECB could see EUR/USD fall toward support at 1.0911.
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