EUR/USD Forecast: Draghi's hands tied, could trigger a bearish breakout

  • USD can rally as long as political jitters remain hidden by the earnings season and solid data.EUR/USD at risk of falling to 1.2100. 
  • No changes to monetary policy or the wording expected from ECB, amid soft inflation, slowing growth.

Another week ends with the EUR/USD pair unable to abandon its comfort zone around the 1.2300 figure. Indeed, intraday trading was a bit more entertained, and some nervous back and forth suggest that it won't be long until a decision is made.

Uncertainty is still the mother of all evils, and while risk-related trading has been put aside, overshadowed by the earnings report season, it still dangles like a Damocles' sword on the markets.

Through these last few days, data has been quite encouraging in the US, while the one coming from the Union suggest that the economic impulse seen through 2017 has reached a peak, and begun decelerating. Not that recession is coming, but growth clearly reached a top. That won't be that bad if inflation would have grown at the same pace, but this week we knew that EU inflation remains well below ECB's "below, but close to, 2%" target.

EUR/USD rally to 1.25 has been driven by speculation that the ECB will have to put an end to QE this year, further fueled by political jitters in the US making the dollar an unattractive asset. However, things are slowly changing, and chances that the ECB will trim QE decreased, as inflation figures are backing ECB's stance of maintaining it for "as long as needed."

The European Central Bank will have its monetary policy meeting this upcoming week, and at this point, no one expected a QE exit decision. The Government Council meeting scheduled for April 26 will likely see no changes to the current policy, neither the wording of the statement. That said, Draghi has always been able to pull an ace from his sleeve.

Back to what was said at the beginning, uncertainty prevails. The risk of a potential trade war between the US and China, the Brexit trade deal, and the geopolitical tensions in the Middle East have become a more relevant factor for central bank decisions than economic growth, or for the matter, slowdown. In such an environment, monetary policy decisions will likely be delayed.

Beyond the ECB's meeting, the next week will also bring the April preliminary Markit PMI, which will offer clues on whether the EU has more room to grow or not, and could be as relevant as the central bank decision. The US calendar will also be a busy one, but Durable Goods Orders on Thursday and Q1 preliminary GDP on Friday will no doubts be the stars.

EUR/USD technical outlook

By the end of the week, the greenback experienced an upsurge, driven by soaring government bond-yields, an increased optimism over the US economic outlook. The 10-year note yield peaked at 2.94% this Friday, its highest since February, while the 2-year note hit 2.44%, its highest since 2008. The weekly chart for the pair shows that the pair remains within a symmetrical wedge, nearing the base of the figure, a daily ascendant trend line coming from March 1st low. The 20 SMA in the mentioned chart heads sharply higher below the current level, currently around 1.2180, but technical indicators have kept easing within positive territory, the Momentum moving faster and nearing its mid-line, but the RSI still well above it amid the pair holding in range. In the daily chart, technical readings point to a downward extension, as the pair has broken below its 20 SMA, now challenging the 100 SMA, and with technical indicators breaking through their mid-lines into bearish territory, with strong downward slopes. The risk is clearly leaned to the downside, although the 1.2150 region needs to give up to open doors for further declines toward 1.2100, a major static support. Below this last, the pair will likely challenge the 1.2000 figure pretty fast. Resistances come at 1.2335, with the next relevant one in the 1.2410/20 region. A break above this last seems unlikely, but if it does, the next probable bullish target comes at 1.2480.

EUR/USD sentiment poll

The FXStreet Sentiment Forecast Poll shows that the dollar regained market favor, at least for the upcoming week, as the American currency is seen up against most of its major rivals. In the longer perspectives, however, the sentiment is not that clear, and still, the average targets are not far from current level, as uncertainty weighs.

For the EUR/USD pair, bears dominate all the time frames under study, up to 71% weekly basis, after accounting for just 54% in the previous week. The average target has been downgraded from 1.2310  to a current 1.2259. The change is little significant in almost every perspective, less than 100 pips down from previous week's estimates, but the sentiment has turned strongly bearish, amid decreasing buying interest. Bulls in the monthly perspective decreased to 32% from 42% while for the three-month view, both, sentiment and the average target remain little changed, mostly due to uncertainty.

The overview chart shows that the trend has turned slightly lower, but that the median lines are above the lows seen a couple of weeks ago, suggesting that speculators hadn't made up their minds just yet. The larger amount of targets, as it has been happening lately, accumulates below the current level in the longer term, with 1.18/1.20 being the target area. 

 

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