Thursday could be a very important day for EURUSD (the ECB meeting) and GBPUSD (UK elections). We start from the first pair and highlight key arguments.
- The ECB will not change rates but adjust its assessment
- Market expectations have been high - a risk for EURUSD longs
- Decision is at 12:45pm BST, conference starts at 1:30pm BST
What will the ECB do?
The ECB has a deposit rate at -0.4% and buys 60 billions EUR of bonds every month to underpin European economy. This is not going to change today. What could change is assessment of risks. Instead of saying that downside risks dominate, the statement could say that risks are balanced. The ECB will also reveal new forecasts (it does it every quarter). This should prepare markets for policy changes next year and has been seen as a positive for the euro.
What we expect?
The European economy surprised positively this year and some political risks (especially in France) have diminished. However, the euro has gained substantially this year. The EURUSD has climbed 7% from the start of the year and could be a bit overbought. We expect the ECB to indeed change language in a more optimistic direction but stop short of signalling any specific policy changes. This could trigger a profit taking on the euro, even if longer term fundamentals remain solid.
How could EURUSD react?
EURUSD is in a clear upward trajectory on a D1 interval but it remains close to highs. Should the ECB provoke a profit taking, a pullback to the 1.1020-1.1110 zone could provide a solid buying opportunity. While a decision is at 12:45 BST we expect decisive moves during the Draghi’s conference (starting at 1:30pm BST).
EURUSD is in an upward trend and a retest of 1.1020-1.1110 demand zone could provide an opportunity to join it. Source: xStation5