ECB Preview: confident Draghi to boost the EUR

The ECB will have a monetary policy meeting this Thursday, but will hardly make any kind of announcement. The European Central Bank announced an extension of its facility program last December, until December 2017, adding also that it would reduce the pace of bond buying starting April from €80 billion to €60 billion.

Minutes from the meeting, released last week, showed that several ECB' governors were against such move, as inflation has begun to pick up, something confirmed with the subsequent releases, although the pace of inflation growth is still quite slow, and the index remains well below the ECB's target of close to, but below 2%.

The annual pace of inflation growth was confirmed at 1.1% YoY this Wednesday, more than doubling November 0.5%, and the first time above 1.0% in more than three years.  While encouraging, it seems too early to consider that deflationary woes are over, particularly after just one reading. Still, the same data showed that only one of the EU's 19 members, Ireland, experienced a decline in CPI during the last month of 2016, meaning that deflationary pressures have diminished.

Growth in the EU seems to have picked up by the end of 2016, with PMIs having steadily advanced in the last quarter of the year and economic sentiment improving. The major problem the region faces now, is political turmoil, which will likely persists all through this 2017.

In general, market believes the ECB is at the beginning of the end of its massive bond-purchase program, even despite Draghi said last December, “ . . . as a matter of fact, it’s not even been on the table.” Investors, however, refuse to believe his words, moreover after the minutes showed dissention among policy makers.  

With all of the above, the Central Bank will likely leave its monetary policy unchanged, while Draghi is expected to offer a hawkish, confident speech. Given that the market is happily unwinding its dollar's longs, the common currency will likely extend its weekly advance following the statement and press conference.

EUR/USD levels to watch

The EUR/USD pair is in wait-and-see mode ahead of the event, holding steady below a critical resistance, the 38.2% retracement of the November/January decline at 1.0710. A spike higher on Tuesday saw the pair topping at  1.0718, which means some follow-through this last is required to confirm an extension towards the 1.0800 region, where the 100 DMA stands right now. The 50% retracement of the mentioned decline is around 1.0820, while a major static resistance comes at 1.0840, pretty much making of  the 1.0800/40 region a major resistance area that the pair will need to clearly surpass to turn firmly bullish.

To the downside, the immediate support comes at 1.0600, followed by 1.0565, the 23.6% retracement of the same decline. A break below this last seems unlikely, but could happen with a surprisingly dovish Draghi, resulting in the pair falling down to 1.0490.