EUR/USD: ECB takes center stage Macroeconomic overview:
- Today, the key event is the ECB meeting. We expect the ECB to announce a tapering path of EUR 30bn of net monthly purchases from January to the end of 2018 (i.e. 30bn X 12 months). Risks are tilted towards lower purchases, mainly due to scarcity. The main risk scenarios are 30bn X 9 months and 20bn X 12 months. In any case, the ECB is likely to leave the program open-ended, promising to buy more if needed. We do not expect any further QE extension into 2019 and we continue to forecast the first increase in the deposit rate in the first half 2019. Some announcement on the reinvestment strategy is likely. This might focus on the possibility of using purchases to calibrate duration extraction from the market in order to preserve accommodative financial conditions consistent with the inflation goal.
- In the last few days bond markets have tentatively corrected, sending yields up; but the absolute level for the 10-Year Bund yield is still around 12bp lower compared to the post-Sintra peak, suggesting markets remain positioned for dovish tapering. Therefore, risks are asymmetrical and skewed towards higher yields. In our view, disappointment could result from either the amount of net purchases in 2018 being lower than EUR 270 bn or from the lack of any reference as to how reinvestments will be carried out. We expect the 10-year Bund yield to move towards 0.60% in the event of a “hawkish” surprise. Scope for a drop in yield in the event the press conference is dovish (our baseline) is relatively limited, particularly in the light of yield momentum in the U.S.
- Turning to FX, the relatively dovish tapering announcement we expect from the ECB today could potentially be followed by a EUR/USD drop towards the 1.1700 baseline. However, we remain confident that any potential dip below this level will not trigger a heavy sell-off and will probably also be short-lived, because even a dovish tapering move would be viewed by investors as one step further in the process of monetary-policy normalization. In addition, this prospect is expected to reinforce the reversal of portfolio flows into the Eurozone that have already emerged over the past few quarters and that, in our view, are expected to support the euro also on a medium-term horizon together with solid fundamentals across the Eurozone. Hence, we think that any EUR/USD dip following the ECB decisions has to be ultimately considered a buying-on-dips opportunity. This will be even more evident if, on the other hand, ECB President Mario Draghi surprises on the hawkish side: in this case we think that EUR-USD could exceed this month’s peak at 1.1880 and then probably even re-approach the 1.2000 area.
Technical analysis and trading signals:
- The EUR/USD climbs above short-term moving averages and looks to challenge 55-dma (1.1842). The prices is mid-cloud and just below the double day highs from October 19-20 at 1.1858. The price is also holding just below a trend resistance line taken off the September 8 1.2092 top, at 1.1845.
- The breakout above the trendline would open the way to September top, but the scenario depends on today’s ECB announcement. We keep our long position unchanged.
EURUSD Daily Forex Signals Chart
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