Tomorrow brings the European Central Bank’s March rate decision to markets. No movement on rates is expected, and as has become usual for ECB meetings of recent, the primary drivers will likely emanate from the details and the verbiage offered by Mr. Mario Draghi during the accompanying press conference.
The big question is the prospect of QE-taper. Recent European economic data has been encouraging of late, with Euro-Zone GDP growth currently tracking at an annualized 1.7%, and inflation in the month of February printing above the bank’s 2% target. With the ECB’s QE program set to scale-down at the end of March, the bank will be buying €60 Billion worth of bonds each month until the end of this year. Investors have already begun to look around the corner in the effort of seeing what the ECB may do next: Whether they’ll let the program run its course at which point the ECB will no longer be feeding liquidity to markets, or whether the bank will look for some type of alternate program or replacement strategy (similar to the Federal Reserve enacting ‘Operation Twist’).
Likely – Mario Draghi will try to straddle the line tomorrow without eliciting too much volatility on either side of the discussion. The prospect of a ‘taper tantrum’ could drive strength into the Euro, obviating some of the recent benefits of the bank’s outsized QE-program, and this could further complicate the Euro-Zone economy’s almost decade-long struggle with lagging growth. Also given the fact that Dutch elections take place next week (March 15 – Fed day), French elections are taking place in April and then German elections in August – and this may not be the best time to rock the boat by introducing new strategies or ideas.
Nonetheless, fully expect market participants to grab on to any potential comment that may allude to what the ECB is looking to do next. Markets getting even an inch of innuendo about a potential taper could drive that into a mile’s worth of volatility. For all of their efforts, European QE did little to actually weaken the Euro, as much of the move came-in before the ECB program had actually begun to buy bonds.
Chart prepared by James Stanley
On the chart below, we dial-in to look at more near-term price action in EUR/USD. In December, the pair caught one-two punch from the ECB (another round of QE) and the Federal Reserve (rate hike); and all that showed-up was a ~150 pip break of that prior support zone with a new-low showing at 1.0340. After that, buyers returned, bringing Euro price action back into the bear-flag in January before prices settled-back to that key level around 1.0500.
Chart prepared by James Stanley
For those looking to substantiate bullish Euro positions, flying in the face of an aggressive U.S. Dollar up-trend could present its own challenges. For bullish Euro approaches, EUR/JPY may be more attractive under the assumption that the BoJ will likely be ‘less-hawkish’ in the future than what we’ve seen out of the Federal Reserve. On the chart below, we start with a ‘big picture’ look at the most recent pressing-themes in EUR/JPY and below that, we dial-in to a shorter-term version.
Chart prepared by James Stanley
On the daily chart below, we can see how this key level of resistance at 123.10 gave multiple iterations of resistance over a two-month period. Eventually, bulls relented and bears took over. But this was a short-term move, as buyers showed back-up at the 50% Fibonacci retracement of the ‘post-Election’ move in EUR/JPY.
Chart prepared by James Stanley
We go a bit closer on the hourly chart below in the effort of focusing on more recent price action. EUR/JPY posed a break out of a bearish channel in early March and since then, it’s appeared that bulls are getting a bit more motivated.
Chart prepared by James Stanley
One pair that will likely remain as an attractive candidate for Euro bulls is EUR/GBP. A heavy dose of caution should be utilized here as GBP/USD is trading very near 30-year lows and the prospect of significant weakness from here could be difficult to prognosticate. Below, we start with the ‘big picture’ look and work our way-down.
Chart prepared by James Stanley
Below, we’re looking at the bullish channel that’s shown up in EUR/GBP after the top-side burst from the Brexit referendum.
Chart prepared by James Stanley
And below, we go down further to look at the 4-hour setup in EUR/GBP. We’ve added a Fibonacci retracement over the bearish move from the January top down to the February low. Notice that current price action is continuing to resist at around the 61.8% Fibonacci retracement of this move. For those looking to buy, support at the 50% marker of this retracement at around .8625 could be attractive for such a purpose.
Chart prepared by James Stanley
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