ECB Meeting: warming up for tapering or not?

Things are a bit more complicated than what they seem ahead of the ECB's monetary policy meeting this Thursday. Let's start by saying that, despite  tapering has been sounding louder and louder, the general consensus point for an on-hold stance, with a clearer bias towards reducing the ongoing bond-buying program to be unveiled next September. Supporting such stance are the latest word's from ECB´s Francois Villeroy, who said that the central bank has defeated the risk of deflation, but adding that, given that the inflation target has not been yet reached, there is still room for accommodative  monetary policy.

The EU economy is doing well, backing Villeroy's words and the optimistic ones offered by Mario Draghi in different events that took place ever since the last meeting. Despite his efforts to down talk his own hawkish stance, market players believe that the beginning of the end is around the corner.

But there's an additional factor playing a big role: the EUR is strengthening at a much faster-than-acceptable pace, according to ECB's non-written standards. It's clearly not a subject that policymakers discuss freely, and of course, there's no mention to it within official statements. But the truth is that a weaker currency has backed the economic recovery and that officials fear a too strong, too fast appreciation will dent the advance towards the inflation target of below, but close to 2%.

 Super  Mario walks in a tightrope, as he can't fool the market by being dovish, but still needs to prevent any further EUR appreciation. So what would it be? Can he be just optimistic enough to be honest, but not that much as for the EUR to rally? Guess Draghi has been reading the same headlines as we did these days, breathing on relief as he can delay the tough announcement until next September.

 

EUR/USD levels to watch                                                                                    

The EUR/USD pair retreated from the over one-year high of 1.1582 achieved on Tuesday on profit taking, holding above 1.1500 ahead of the event, with the ongoing retracement looking corrective within a strong bullish trend.

Technical readings in the daily chart favor an upward extension as the 20 DMA has accelerated its advance below the current level but above the 100 and 200 DMAs, which also present bullish slopes. The Momentum indicator in the same chart has partially lost its bullish strength, but remains well above its mid-line, while the RSI indicator barely retreated from overbought readings, rather reflecting the latest pullback than indicating a bearish extension ahead.

The key support stands at 1.1460, and as long as above it, the pair has scope to extend its advance up to 1.1615  first,  May 2016 monthly high, followed later by  August 2015 high. Below the mentioned support on the other hand, the corrective movement can extend down to the 1.1370/80 region, where the pair met buyers last week. The next relevant support comes at 1.1290, June 28th low, and it would take a break below this last to confirm an interim top and further declines, something quite unlikely at the time being.