Will ECB stop EUR/USD rally today?

EUR/USD: Will ECB attempt to lean against euro strength?

Macroeconomic overview:

• Today, the ECB is likely to confirm both its monetary policy and the key pillars of its rhetoric. While the account of the December meeting hinted at a possible communication change “early” this year, we think that any revision to the forward guidance will have to wait at least until March. Comments by Vice President Vitor Constâncio support this view. After all, we are just two weeks into the QE tapering to EUR 30bn per month and core inflation remains stuck below 1% with no signs yet of a sustainable upward trend. The main focus is whether the central bank will show concern about recent euro appreciation.

• What a day it was yesterday in FX market! Apparently, it was not enough that the greenback has come under immense pressure over the past year on account of overvaluation, messy US politics and a re-pricing towards a stronger global growth outside the US. Now its decline is being openly “endorsed” by US Treasury Secretary Steven Mnuchin, who praised the weak dollar for its beneficial effect on the economy’s trade balance. Surely, FX-eyes today will turn to the ECB meeting and Mario Draghi’s press conference to see whether the central bank will attempt to lean against EUR/USD strength.

• We would push back against these concerns: to be clear, while the EUR/USD ascent to multi-year highs is not something that the ECB is thrilled about, it is not something it should be overly worried about either. First, growth is too strong – both domestically and abroad – for the central bank to revert to its 2015 “obsession with the exchange rate”. Second, despite EUR/USD having risen by more than 5% since the last ECB meeting in December, the trade-weighted EUR has appreciated at a far slower pace, around 1%. This is because the narrative in the FX market is not just about euro-strength but also about dollar-weakness. Which brings us to our last point: it is really very difficult to envisage a meaningful and sustainable turn in the USD anytime soon, especially when US political endorsement of the “weak-dollar” is added to the symphony of other USD-bearish factors.

• Needless to say that, if Mario Draghi warns again that the volatility in the FX market is a source of uncertainty and requires monitoring, then we would be buyers of any potential EUR/USD retreat. Although these comments (used in September 2017) were associated with the pair declining from 1.20 to 1.1560, this move largely reflected a dollar pullback (that lasted for a couple of months) rather than idiosyncratic euro weakness; and it is very difficult in this environment to imagine a similar USD rebound – though short-term rallies should be expected.

Technical analysis and trading signals:

• The EUR/USD bias remains on the upside, scope for eventual gains to the 1.2599 major Fibonacci level – 61.8% retrace of the 1.3995-1.0340 (2014-2017 fall). 14-week momentum remains positive, reinforcing the underlying bullish bias.

• We are looking to buy on dips, which are likely if Draghi warns against the EUR moves at today’s press conference.

NZD/USD rally hampered by New Zealand’s inflation data

Macroeconomic overview:

• New Zealand's consumer prices rose at a slower-than-expected pace in the fourth quarter of last year, weighed by the falling costs of cars and food and hosing down expectations that the central bank will raise interest rates this year.

• The consumer price index posted annual growth of 1.6%, edging back from the 2% midpoint of the central bank's target band and below the market expectations of 1.9%

• The surprise result was unwelcome news for the Reserve Bank of New Zealand, which has kept the official cash rate at a record low of 1.75% since late 2016 in an effort to help consumer price inflation stabilise around the middle of its 1% to 3% target band.

• The RBNZ is set to meet on February 8 for its first monetary policy decision of the year.

Technical analysis and trading signals:

• The pair remains above 7-day exponential moving average, which keeps bullish bias intact, but long upper shadow on candlestick chart yesterday suggests that NZD/USD rally is losing its momentum.

• We placed NZD/USD bid at 0.7300.

TRADING STRATEGIES SUMMARY:

FOREX - MAJOR PAIRS:

FOREX - MAJOR CROSSES:

PRECIOUS METALS:

How to read these tables?

1. Support/Resistance - three closest important support/resistance levels

2. Position/Trading Idea:
   BUY/SELL - It means we are looking to open LONG/SHORT position at the Entry Price. If the order is filled we will set the suggested Target and Stop-loss level.
   
   LONG/SHORT - It means we have already taken this position at the Entry Price and expect the rate to go up/down to the Target level.

3. Stop-Loss/Profit Locked In - Sometimes we move the stop-loss level above (in case of LONG) or below (in case of SHORT) the Entry price. This means that we have locked in profit on this position.

4. Risk Factor - green "*" means high level of confidence (low level of uncertainty), grey "**" means medium level of confidence, red "***" means low level of confidence (high level of uncertainty)

5. Position Size (forex) - position size suggested for a USD 10,000 trading account in mini lots. You can calculate your position size as follows: (your account size in USD/USD 10,000) * (our position size). You should always round the result down. For example, if the result was 2.671, your position size should be 2 mini lots. This would be a great tool for your risk management!
   
   Position size (precious metals) - position size suggested for a USD 10,000 trading account in units. You can calculate your position size as follows: (your account size in USD/USD 10,000) * (our position size).

6. Profit/Loss on recently closed position (forex) - is the amount of pips we have earned/lost on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.
   
   Profit/Loss on recently closed position (precious metals) - is profit/loss we have earned/lost per unit on recently closed position. The amount in USD is calculated on the assumption of suggested position size for USD 10,000 trading account.