The near-term price action is not telling us anything though
Although the euro is a little firmer in the European morning, it isn’t amounting to much as EUR/USD sits in between both key hourly moving averages with the ECB in focus today.
That suggests that the near-term bias is more neutral as price slowly broke above the 200-hour MA (blue line) earlier only to run into resistance at the 100-hour MA (red line).
The intuitive play here will be to ride either side of a break with added conviction seen on a break either below the 1.1000 handle or the near-term trendline resistance @ 1.1048. However, I reckon the reaction to the ECB later will be anything but straightforward.
There are two parts to look out for in the event later. The first will be the meeting decision itself. The second will be Draghi’s press conference.
As for the former, baseline expectations is for a 10 bps rate cut, rate tiering, change in forward guidance and QE reintroduction around the realms of €30 billion. But even in such a circumstance, the details – especially that of QE – will matter more.
I can imagine a weak stimulus package resulting in a knee-jerk reaction higher in the euro but potentially tempered by sentiment that such a move means that the ECB has resigned to letting the euro area economy fumble.
In the opposite case (strong stimulus package), it is likely to reignite further downside in the euro and in this scenario I think the details of QE (and if the ECB is willing to cut more) will matter more in determining how strong the conviction will be for sellers.
Those are just two simplistic scenarios on how things may play out later on. After that, it will boil down to Draghi’s press conference.
Here, it will depend on how positive (dovish) a spin Draghi would put on the stimulus package. His communication may cause a bit of near-term nudges but eventually the stimulus package is plain for all to see and scrutinise.
As such, price action will eventually lead back to the scenarios above.
I reckon one thing to watch out for is if Draghi starts alluding to fiscal stimulus to support what the ECB is doing. If he harps on that, it is but a subtle hint that they know monetary policy alone isn’t going to cut it.
But should he go all out on shifting the blame to governments, I don’t see how that is euro positive as so far there hasn’t been any suggestions of fiscal help to add to the ECB’s stimulus package in order to bolster the euro area economy and inflation.