EUR/USD analysis: As post-ECB volatility recedes, focus shifts to US data/next week’s FOMC meeting

  • ECB cuts interest rates further into negative territory and announces a new stimulus package.
  • The Euro initially tumbles in reaction to a more dovish tilt by the ECB but recovers swiftly.
  • Investors now look forward to the US monthly retail sales data for some short-term impetus.

The EUR/USD pair had a rather volatile trading session on Thursday and was solely influenced by the latest ECB monetary policy update. The shared currency initially ticked higher but subsequently nosedived to retest 2019 lows after the European Central Bank, as was widely expected, lowered interest rates further into negative territory and announced fresh stimulus measures. The ECB cut its deposit rate by 10 bps to a historic low level of -0.50% and reintroduced an open-ended long-term government bonds purchase program at a pace of €20 billion a month from November.
This coupled with the ECB President Mario Draghi's comments at the post-meeting press conference, reiterating that downside risks to the Euro-zone economic outlook persist, and a downward revision of the GDP/inflation projections further collaborated to the intraday bearish pressure. The ECB now sees the economy in the region expanding 1.1% this year (from 1.2%), 1.2% in 2020 (from 1.4%) and 1.4% in 2021 (unchanged). Regarding inflation, the bank’s Staff expects consumer prices to rise 1.2% in 2019 (from 1.3%), 1.0% in 2020 (from 1.4%) and 1.5% in 2021 (from 1.6%).
As investors digested a more dovish tilt by the ECB, the pair witnessed a dramatic intraday turnaround and rallied around 160-pips from daily lows. The sharp reversal lacked any obvious catalyst but followed the US President Donald Trump's comments, accusing the Fed for not doing enough to support the US economy. On the economic data front, the US consumer inflation - as measured by the headline CPI - rose 0.1% in August and the core CPI advanced 0.3%, lifting the year-over-year rate to 2.4% as compared to 2.2% previous and 2.3% expected.
The pair touched a two-week high level of 1.1087 before easing a bit, still ending the day with strong intraday gains. The pair held steady above mid-1.1000s through the Asian session on Friday as market participants now look forward to the US economic docket - highlighting the release of monthly retail sales data - for a fresh impetus. Consensus estimates point to a sharp deceleration to 0.2% month-on-month in August from the previous month's strong gains of 0.7%. A weaker reading might exert some downward pressure on the greenback, albeit is unlikely to be a game-changer ahead of the next big event risk - the FOMC monetary policy meeting on September 17-18.

Short-term technical outlook

Despite the overnight upsurge, the pair struggled to make it through the 1.1085-90 resistance, marking 50% Fibo. level of the 1.1251-1.0926 downfall, which should now act as a key pivotal point for bullish traders. Above the mentioned barrier, the is likely to accelerate the up-move further towards 61.8% Fibo. level resistance near the 1.1125-30 area en-route the next major hurdle near the 1.1175-80 region (100-day SMA).
On the flip side, 38.2% Fibo. level - around mid-1.1000s – now seems to act as immediate strong support, which if broken might prompt some technical selling and accelerate the slide back towards the 1.1010-1.1000 region. Failure to defend the 1.10 handle (nearing 23.6% Fibo. level) will negate prospects of any further recovery, rather turn the pair vulnerable to slide back towards the multi-year swing lows support - around the 1.0925 area - before eventually dropping farther below the 1.0900 round figure mark towards testing its next major support near the 1.0835-30 region.


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