EUR/USD: Will Dovish Draghi Be Enough To Weaken The EUR

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Taken Positions

EUR/USD: long at 1.1345, target 1.1550, stop-loss 1.1285, risk factor *

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USD/CAD: sell at 1.3210, target 1.2830, stop-loss 1.3320, risk factor **

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EUR/USD: Will Dovish Draghi Be Enough To Weaken The EUR?

(long at 1.1345)

• The European Central Bank meeting will be the key event of today. The announcement of the decision is scheduled for 11:45 GMT and Draghi's press conference will be at 12:30 GMT. We expect no action and dovish rhetoric, mainly intended to stem the EUR appreciating trend. A dovish rhetoric is already priced in, but some investors expect also the announcement of an extension of QE already at this meeting. In our opinion the ECB President Mario Draghi is likely to talk down the currency today, but he is unlikely to deliver the extension of the QE programme or a further cut in the bank’s deposit rate. The ECB is still in wait-and-see mode, assessing incoming data for the possible materialization of downside risks.

• Financial markets may be disappointed in case of no action from the ECB today and dovish rhetoric will be not enough to stop the EUR/USD rise. We do not change our trading strategy – we stay EUR/USD long.

Significant technical analysis' levels:

Resistance: 1.1387 (high Oct 20), 1.1420 (high Oct 16), 1.1495 (high Oct 15)

Support: 1.1300 (psychological level), 1.1268 (low Oct 9), 1.1233 (low Oct 8)

USD/CAD: Stop-loss Hit After BOC Trimmed Growth Outlook

(sell again at 1.3210)

• The Bank of Canada maintained its target for the overnight rate at 0.5%.

• Inflation has evolved in line with the outlook in the Bank's July Monetary Policy Report. Total CPI inflation remains near the bottom of the Bank's target range, owing to declines in consumer energy prices. Core inflation is close to 2% as the transitory effects of the past depreciation of the CAD are roughly offsetting disinflationary pressures from economic slack, which has increased this year.

• Global economic growth has been a little weaker than expected this year, but the dynamics pointing to a pickup in 2016 and 2017 remain largely intact. However, lower prices for oil and other commodities were dampening business investment and exports in the resource sector. This prompted a cut in the growth forecast to 2.0% from 2.3% for 2016, and to 2.5% from 2.6% for 2017. It pushed back the time frame for when the economy will reach full capacity to mid-2017 from its July estimate of the first half of 2017, as economic slack has increased.

• The Bank of Canada said that lower mortgage rates are contributing to strong growth in household borrowing. The lower cost of debt is also supporting other forms of consumer credit growth and spending, with consumption resilient despite the hit to incomes from lower commodity prices, the bank said. Canadians' debt-to-income ratio is at a record high. The bank expects the housing market and household indebtedness will stabilize over the next two years as the economy recovers momentum and as household borrowing rates start to normalize.

• The CAD weakened more than 1% against the USD after the Bank of Canada lowered its growth forecasts for 2016 and 2017. Our USD/CAD short hit the stop-loss level at 1.3130. A rise in the USD/CAD was halted by 1.3144 – 50% retrace of 1.3457-1.2832.

• The risks to our bullish view on the loonie have increased.However, the BoC signaled longer-lasting damage from lower oil prices, but this drag may be progressively absorbed in our view if oil prices recover as we expect over the medium term. Rather than signaling that it would be ready to cut rates soon, the BoC appears to be more supportive of the current neutral stance. Our trading strategy is to sell the USD/CAD again at higher levels. We have placed our sell order at 1.3210.

Significant technical analysis' levels:

Resistance: 1.3144 (session high Oct 22), 1.3175 (high Oct 5), 1.3200 (psychological level)

Support: 1.3000 (psychological level), 1.2969 (low Oct 21), 1.2935 (low Oct 20)