The EURUSD has been stuck in a tight range for the past 3 months as economic conditions deteriorated in both US and EU. Such long period of calm often resulted in big directional swings in the past. Could the ECB be the trigger?
- EURUSD could use some bond market guidance
- Investors still likely positioned in the dollar
- ECB to be more dovish, policy change unlikely
EURUSD and the bond market
As economic conditions deteriorate bond yields decline both in the US and EMU. But the USD yields decline from a higher level so technically the US dollar has more to lose from the move. It looked as if it was about to happen when the pair cracked 1.15 but the a dovish speech from the ECB president undermined the euro. A bond yield spread line still runs much higher than the EURUSD but obviously there’s no guarantee this will translate into the EURUSD rally.
The bond market offers some upside, but will the euro take advantage? Source: Bloomberg, XTB Research
Because of the US government shutdown the CFTC data on positioning have not been updated for a month now. Before that the positioning was tilted in favour of the dollar suggesting it could have more “to lose”. However, this is just one of many indicators.
From a longer perspective the pair remains in a downward trend as we have a sequence of lower lows and lower highs. Within that broad downward channel we have seen a consolidation that could herald bottoming out but if this bottoming out fails, the last 3 months can turn into a flag pattern and result in a bearish impulse. Most importantly, as we head to the ECB meeting EURUSD buyers face the challenge of defending lower limit of the flag and the 1.13 level.
EURUSD faces key supports ahead of the ECB meeting. Source: xStation5
It looks like the euro wasted some opportunities to move higher at the beginning of 2019. The ECB will have to admit that the economic situation has deteriorated but that’s already discounted by the markets and president Mario Draghi will stop short of suggesting any policy change. The biggest mover that we could imagine would be a hint at a possible return of the QE policy, something that EURUSD buyers hope will be avoided.
This content has been created by X-Trade Brokers Dom Maklerski S.A. This service is provided by X-Trade Brokers Dom Maklerski S.A. (X-Trade Brokers Brokerage House joint-stock company), with its registered office in Warsaw, at Ogrodowa 58, 00-876 Warsaw, Poland, entered in the register of entrepreneurs of the National Court Register (Krajowy Rejestr Sądowy) conducted by District Court for the Capital City of Warsaw, XII Commercial Division of the National Court Register under KRS number 0000217580, REGON number 015803782 and Tax Identification Number (NIP) 527-24-43-955, with the fully paid up share capital in the amount of PLN 5.869.181,75. X-Trade Brokers Dom Maklerski S.A. conducts brokerage activities on the basis of the license granted by Polish Securities and Exchange Commission on 8th November 2005 No. DDM-M-4021-57-1/2005 and is supervised by Polish Supervision Authority.