EUR braced for ECB meeting, but central bank likely to hold fire
This Thursday’s European Central Bank press conference is eagerly awaited by the forex markets for clues on whether the central bank will announce an escalation of its monetary policy.
In recent days EUR/USD has been pulling back from highs of 1.1495. However, the ECB is unlikely to make a major announcement at this week’s press conference other than to reiterate concerns over deflation and a readiness to tackle it full on if conditions don’t improve.
Any formal push to increase its EUR 60 billion / month quantitative easing programme or to extend it beyond September 2016 probably won’t come until December when it publishes its quarterly economic forecasts. Given the headwinds buffeting the global economy the ECB may decide there is a need for more stimulus to support the Eurozone’s pedestrian GDP growth after studying the forecasts. That looks increasingly likely.
Yet despite the QE programme, deflation has once again struck in the Eurozone with CPI registering -0.1% in September, while August PPI was -2.6% year-on-year. The CPI figure remains well below the central banks 2% inflation target.
But it’s not all bad news for the central bank. It looks like commercial banks are responding to the QE programme by easing lending restrictions to companies – one of the goals of the ECB – and that loan demand is rising, according to the central bank’s lending survey. It remains to be seen if this translates into sustainable credit growth and in turn boost the economy.
Nonetheless, the ECB may well use the press conference as an opportunity to talk down the EUR, which is up considerably from levels of around 1.0800 in July to above 1.1300 now and has even been as high as 1.1715 in August.
One of the reasons for that rise are the continuous delays in the Federal Reserve raising interest rates – it may now not happen until next year, if at all. Some market participants are even beginning to speculate about the prospect of a QE4 programme from the Fed next year, which is likely to be very bearish for USD and at the same time push EUR higher.
Though the ECB has no official exchange rate target, it clearly does not want a strong currency restricting Eurozone exports (a source of economic growth) or to import deflation from imports priced in foreign currencies. Meanwhile, the region retains a formidable current account surplus even if did slip in August.
TECHNICAL ANALYSIS: Look for EUR/USD to stay within ‘its box’ during ECB conference
Last week EUR/USD looked poised for a breakout on the upside with a short-term high of 1.1495 reached, but subsequently the pair fell back and made a short-term low of 1.1305. Nonetheless, the trend remains upwards, despite retreating from a high of 1.1715 at the end of August. Since then it’s been a series of higher lows and highs.
The pair are above the 50-day and 200-day moving averages (its downward slope is starting to straighten up) and the two MAs crossed in early October giving a buy signal. The slow stochastics gave a sell signal, which has quite possibly played out and it could soon generation a buy. Nonetheless, events can quickly undo even the most bullish of charts with the ECB press conference on Thursday potentially being one of those moments
A relatively uneventful press conference is likely to see EUR/USD stay within ‘a box’ of 1.1305-1.1495. If it breaks above that level that could be a positive sign, which could carry the pair all the way to levels of around 1.1600. A breach of support could see the pair slip to levels of about 1.1200 and start to draw question marks over whether the EUR’s rally since the summer is coming to an end. .