EUR/USD flat, but not for long, ECB Thursday could shake it up

• EUR/USD is the one to watch this Thursday, hawks circle over Frankfurt.
• US dollar testing critical daily dynamic resistance, bulls on guard.

At the time of writing, EUR/USD is flat at the start of Sydney's trade, clinging to near 1.1850 and between a low of 1.1840 and a high of 1.1846.

The week is about to pick up with the central; banks taking the limelight at the start of a new quarter. 

One down, two to go

The Reserve Bank of Australia met yesterday, the Bank of Canada meets today and the European Central bank, perhaps the most highly anticipated of them all, meets on Thursday. 

We also have speeches from the Federal Reserve members, the Bank of England and also RBA officials.

Meanwhile, the RBA's decision not to walk back its timeline for tapering yesterday was met with volatility that settled down into a sell-off in the Australian dollar. 

Due to the board members concerns for the Delta variant spreading and subsequent lockdown extensions, the RBA QE purchases are now running at A$4bn/week from this month onwards compared to the earlier rate at A$5bn/week.

The RBA acknowledged the poorer-than-expected economic outlook and decided to hold the reduced QE pace of A$4bn/week until at least mid-February next year, instead of their earlier November 2021 review. 

The Bank of Canada is not expected to change policy or forward guidance although the second quarter Gross Domestic Product report does introduce a wildcard to the meeting. However, it is just one piece of positive data amongst a myriad of Coronavirus Delta risks and a weaker outlook.

This then brings the attention to the ECB. 

All eyes on ECB, how hawkish can you go?

EUR/USD: ''The first P in PEPP stands for Pandemic, not Permanent''

ECB is seen debating a cut in stimulus at its meeting on Thursday.

Without anything in the way of a public pushback from the doves at the ECB, the centrist French central bank chief Francois Villeroy de Galhau had argued for such a move to be included on the agenda this week. 

“The first P in PEPP stands for pandemic, not permanent, and for a good reason,”

Bundesbank President Jens Weidmann said last week.

There are expectations that the Governing Council will try to keep any tapering speculation at bay.

The euro has been fuelled of late by hawkish anticipations in markets.

However, the single currency could give up some of the hawkish expectations priced in should the ECB still come with a very cautious stance.

This might also be reflected in broadly unchanged inflation forecasts for 2022 and 2023.

As it stands, implied volatility in the options market is not pricing in anything much higher than normal around the meeting. The break-even on a straddle (which is a bet on higher volatility) on Thursday is currently 27 pips.

Meanwhile, analysts are expecting purchases under the ECB's Pandemic Emergency Purchase Programme (PEPP) to drop possibly as low as 60 billion euros a month from the current 80 billion, which would be considered a de-facto taper. 

EUR/USD technical analysis

The price has dropped to the 38.2% ratio and could be on the verge of a deeper correction to the 61.8% that meets the prior highs. 

When compared to the DXY, the bias could be confirmed if the bulls stay above the dynamic resistance and the 61.8% ratio: