Currency Forecast EURUSD; Draghi’s Dire Predictions

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Currency Forecast EUR/USD; Draghi’s Dire Predictions

Draghi’s Warnings Tank Euro

Outgoing ECB Chief Mario Draghi did not produce additional stimulus at his final meeting but he did leave the bank and the EU with a warning. Ongoing weakness in global economies associated with but not limited to impacts from the U.S./China trade war threaten EU stability. If further actions are not take it is possible the EU could see prolonged and protracted weakening, especially in the pillar-economy of Germany. Germany is already on the brink of recession, a tip in the wrong direction could have far-reaching repercussions for the EU and the world.

The incoming data since the last governing council meeting in early September confirm our previous assessment of a protracted weakness in the euro area growth dynamics, the persistence of prominent downside risk and muted inflation pressure”

The EUR/USD had been trading higher before the comments. The ECB’s lack of policy change coupled with a high-probability FOMC rate cut next week was driving the move. The comments undermined any hope of bullishness for euro traders because it virtually assures Christine Lagarde will follow-through on Draghi’s plans. The pair is now in retreat and likely heading to the 1.1050 level and the short-term moving average. The moving average will likely provide support until next Wednesday afternoon at which time the FOMC will take control of the market.

The longer-term outlook for the pair is range bound. The FOMC is largely expected to cut rates at the next meeting but the outlook for future cuts is still cloudy. No member of the committee is in favor of aggressive cutting and most think the “mid-cycle adjustment” is over. The risk for traders today is whether or not the FOMC’s outlook has changed. It is possible the committee could preemptively cut by 50 bps instead of the expected 25, they may instead indicate future cuts are needed, they may even decide that “wait and see” is still the way to go. It’s all up in the air.

The extreme-peak formed on the daily chart suggests the recent high will be tested again. The caveat is that support at the low end of the newly established range could easily be tested again before that happens. The indicators are consistent with a peak, we’ll have to wait on the FOMC to see if there is another bullish wave waiting to crash or if the bears will take over the market. A move below the EMA with a close AFTER the FOMC meeting will be bearish. Until then I’d use the EMA as a take-profit target for bearish trades and possible entry point for bullish.

EUR/USD And Draghi’s Press Conference

ECB Keeps Interest Rates Unchanged

The ECB Governor Mario Draghi conducts ECB press conference, key points follow:

  • Recent Euro volatility is source of uncertainty
  • Underlying inflation pressure remains subdued
  • Mid-term outlook broadly unchanged
  • ECB raises 2020 GDP forecast 2.2% fastest since 2007
  • Structural reforms must be stepped up substantially
  • ECB to decide on policy calibration beyond 2020
  • Stimulus pass-through supports domestic demand
  • ECB sees 2020 Economic Growth 2.2% vs 1.9%, 2020 Economic Growth 1.8% vs 1.8%
  • Core inflation to rise gradually over mid-term
  • Core inflation has yet to show convincing upward trend
  • ECB cuts 2020 inflation forecast to 1.2%, 2020 to 1.5%
  • Core inflation is doing slightly better
  • The exchange rate used in projections was around 1.18 in EUR/USD

The EUR/USD climbed to the main resistance level of 1.2053 after Draghi’s Speech and then showed pullbacks from that level. In order for the bullish action to accelerate, it needs to sustain above 1.2053. On the other hand, if the price shows some profit taking action, we will face support levels at 1.1968 and 1.1884.

  • Support: 1.1968 – 1.1884 – 1.1812
  • Resistance: 1.2053

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Euro Waits for Draghi as ECB to Keep Rates Unchanged

Fundamental Forecast for EUR/USD: Neutral

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– The ECB meets this week, but it is an off-cycle meeting for staff projections, so no change in policy is expected. ECB President Draghi’s press conference is in the spotlight.

– Profit taking in the Euro is possible if the ECB takes issue with the rally in the exchange rate and underperformance in energy prices in recent weeks.

– See our Q3 ’17 EUR/USD forecast at the start of the new quarter.

The Euro took a step back last week, even as the US Dollar suffered broadly, perhaps exposing the Euro as a currency whose good fortune has been priced in. The most recent driver, higher sovereign bond yields on the back of hawkish commentary from European Central Bank officials, had run its course.

Even with the ECB set to meet this Thursday for the July meeting, a lack of new staff economic projections (SEPs) should keep a lid on interest rate speculation. As a result, with the ECB set to keep rates unchanged, traders should be focusing on President Mario Draghi’s press conference for clues as to what the central bank will do next.

With the ECB quiet for some time about the FX channel, the Euro had been given some breathing room to rally against its peers. Yet the Euro’s strength may only be tolerated for so long. The ECB’s technica l assumption for EUR/USD in 2020 is 1.0800 ; it clo sed last week just above $1.1450 . Brent Oil, the energy input the ECB bases their inflation forecasts around, is foreca st at $51.60 per barrel for 2020. E nergy prices are underp erforming the ECB’s forecast by -5.2%.

A few more months of a stronger Euro, weaker energy prices, and persistent underperformance in inflation readings, and it’s easy to envision the ECB taking issue with the market’s hawkish interpretation of the policy adjustments being made . For now, it seems officials are suggesting that a step down in the QE program could come as soon as September. The key point is that i t’s just not going to be this week. Due to the fact that the ECB is one of many central banks that have fallen into a predictable pattern of when policy action is most likely to arrive – only when forecasts are updated – this means that September or December will likely be when any significant issues are raised .

Market positioning would dictate that a move lower in the Euro on Thursday around the ECB rate decision would be of the profit taking variety. Certainly, the Euro long trade is getting crowded (relatively speaking). According to the CFTC’s latest COT report, there were 83.8 K net- long contracts held by speculators in the futures ma rket for the week ended July 11 , the highest level since the week ended May 3, 2020 .

In lieu of new staff forecasts, ECB President Mario Draghi’s press conference will carry additional weight as market participants try to read between the lines. Given the recent pattern of President Draghi trying explicitly to prevent a sharp correction higher in core sovereign yields after ECB rate decisions, the Euro may be hard pressed to find bullish drivers on Thursday.

— Written by Christopher Vecchio, Senior Currency Strategist

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