- The European Central Bank is set to announce its policy decision and projections on Thursday.
- ECB’s Lagarde will hold a press conference and volatility for EUR/USD is expected.
- The short-term uptrend continues to struggle higher as positive Eurozone data contrasts with US results.
EUR/USD is trading in the upper 1.08s on Thursday prior to a fanfare event for the FX markets this week – the European Central Bank (ECB) policy announcement, scheduled for 13:15 GMT.
The EUR/USD pair made it all the way up to ding-a-ling 1.0900 on Wednesday after the release of better-than-expected German trade and Eurozone Retail Sales data boosted the Single Currency. Now traders appear to be in wait-and-see mode prior to hearing the results of the ECB’s roundtable.
Euro could weaken on talk of conditions for a cut
It is highly unlikely the gentlefolk of Frankfurt will decide to cut the ECB’s main refinancing operations rate from 4.5% at the meeting. Current market expectations are for the first interest rate cut to come in June.
According to analysts at ING bank, what is more likely is that the bank will clarify the economic conditions that would prompt a cut. Such talk will probably have a slightly negative impact on EUR/USD, though it is not seen breaking below 1.0800.
“President Lagarde may start laying out the conditions for easing policy. That may be perceived as slightly dovish, meaning a softer EUR and a re-flattening of the money market curve are tangible risks.” Says Benjamin Schroeder, Senior Rates Strategist at ING.
February inflation data for the Eurozone showed a decline to 2.6% from 2.8%. This is not far from the ECB’s 2.0% target, however, core inflation remains sticky at 3.1%, notes FXStreet’s Yohay Elam in his preview, suggesting persistent base effects will act as a restraint on the ECB. At the same time, flatlining growth in the region is a compelling counter-reason for the ECB to lower interest rates.
On the Horizon
Apart from the ECB meeting, the next big event for the pair is US Nonfarm Payroll data out on Friday at 13:30 GMT. If the jobs data is soft, in line with the ADP and JOLTS Job Openings data from earlier in the week, it could weigh on the USD and give EUR/USD another boost.
Also on Friday is the final estimate of Eurozone GDP data out at 10:00 GMT, with no-change in the run of sclerotic growth foreseen for the fourth quarter. If the revision tips into negative territory it will make the argument for a rate cut sooner all the more compelling, weighing on EUR/USD.
Technical Analysis: Euro’s slow ascent continues
Turning to the charts, the EUR/USD continues its laborious climb from February’s 1.06 base-camp lows. In the short term, the peaks and troughs are rising, suggesting a tentative uptrend is in progress that slightly favors bulls. The longer-term trend is sideways and difficult to forecast.
-638454024947009479.png)
Euro vs US Dollar: 4-hour chart
The daily chart below shows buyers seem to have now successfully slain key resistance from the 50-day Simple Moving Average (SMA) at 1.0859 (orange line) and established a tentative foothold above. This is a bullish sign, reinforcing the validity of the short-term uptrend.
-638454025389294595.png)
Euro vs US Dollar: 1-day chart
The next target to the upside now is the 61.8% Fibonacci retracement of the early 2024 decline, at 1.0972. A break above that level would further encourage confidence from bulls.
A break beneath the 1.0795 lows would spoil the buyer’s party and indicate a vulnerability to break down.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region.
The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa.
The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro.
QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.