- Tension is mounting ahead of the all-important ECB decision.
- High expectations may lead to a bitter disappointment and a surge for EUR/USD.
- Thursday's chart is showing a wedge that implies substantial moves.
D-Day is finally here – and EUR/USD traders' tension is sky-high. D is for Mario Draghi, president of the European Central Bank who will reveal the bank's new measures to combat the slowdown in growth and inflation.
The ECB is set to cut interest rates by at least ten basis points – from an already negative -0.40% to -0.50%. It will most probably extend its commitment to maintaining low interest rates for longer. However, if it sticks to these minimal expectations, EUR/USD may leap. Several hawkish members of the Frankfurt-based institution have expressed their doubts about aggressive action and if they win – EUR/USD bulls will win as well.
On the other side of the spectrum, Draghi and his colleagues at the Governing Council may decide to cut rates by 20bp and also renew the bond-buying scheme. The highest estimates stand at an open-ended commitment to buy 50 billion euros per month. That would send EUR/USD plunging.
In the middle, there are various additional scenarios.
The ECB is set to act in response to worsening economic conditions. Inflation remains subdued with the Core Consumer Price Index (Core CPI) slipping below 1%, far from the bank's 2% target. The German economy contracted in the second quarter and indicators in the third quarter are pointing to another negative quarter – an outright recession.
A significant part of the euro zone's pain originates from weaker demand from China. The US-Sino trade wars are taking their toll. However, the most recent developments have been positive. President Donald Trump tweeted that he is postponing new tariffs from October 1 to October 15, as a gesture to Beijing ahead of China's National Day early in the month. China will reportedly allow companies to purchase American agrifoods.
These gestures of goodwill come ahead of high-level talks scheduled for next month and help soothe market tensions. Investors are selling off safe US bonds. The consequent rise in yields implies lower chances of extended loosening by the Federal Reserve in its decision next week, and the dollar is on the rise.
The Fed and markets will receive a substantial clue toward the decision from today's release of US inflation figures. A minor acceleration in Core CPI is on the cards.
EUR/USD Technical Analysis
EUR/USD is trading in a narrowing triangle or wedge. Technical analysis textbooks suggest that high volatility will replace the narrow range trading once the pair chooses a direction. Where will it go? Other indicators are leaning to the downside.
The currency pair is clinging to the 50 Simple Moving Average and trades below the 100 and 200 SMAs. Momentum is marginal to the downside while the Relative Strength Index (RSI) is listless.
Support awaits at 1.0985, which was a low point on Wednesday. It is followed by 1.0960 that was a swing low in late August, and then by 1.0926 – the 2019 trough. 1.09 and 1.0820 are next.
Looking up, resistance awaits at 1.1055, which held the pair down earlier this week. Next, we find 1.1090 that is the high point in September, followed by 1.1115 that served as resistance several times in August. 1.1190 and 1.1230 are next.
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