Valeria Bednarik : ECB Drive For Euro


ECB´s QE extension and rates
The European Central Bank is heading into the first economic policy meeting of this 2016 and market participants agree that no new measures will be announced this Thursday.

Following a painful battle between doves and hawks, the Governing Council finally decided to extend QE last December, but refrained from expanding it. That means that, while it would be extended in term up to March 2017 or beyond and more assets have entered the buyable range, the ECB kept the pace of QE steady at €60bn a month. Also in December, Mario Draghi and Co. decided to cut further into negative territory the deposit facility rate but by less than what investors were expecting.

The market got so disappointed with Draghi that EURUSD rallied 400 pips. And even the Fed delivering their first rate hike in over a decade couldn't affect that surge. Actually, the pair is trading around 1.0910, pretty much where the market closed on December 3rd, just after last ECB press conference.

As said before, and for this upcoming meeting, markets' participants believe that no changes are to be make in the monetary policy stance, as the European Central Bank likes to "wait and see" after an announcement of the magnitude of December one.

Nevertheless, there's also a general consensus that Draghi's words will be dovish this time, as growth has remained weak in the region, not to mention inflation, still near deflationary levels as oil prices plummeted to over 12-year lows.

The more dovish the tone, the higher the chances of further easing in the future, which means that investors can end sending the common currency up with a dovish ECB, once they start pricing in more easing.

In one line, the ECB will likely refrain from adding more easing this week but will leave doors open to do so in the future. And the common currency's reaction will depend on the depth and extension of the possible future easing tip toed tomorrow. However, the China/oil scheme will likely retain its condition of market leader, meaning that the pair's reaction can be neutralized after some wild initial spikes.

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From a technical point of view, the EUR/USD pair has been unable to establish a clear direction, after the long term bearish trend was interrupted by December's ECB announcement.

After rallying up to 1.1059, the pair entered in a corrective phase that sent price down to the 61.8% retracement of the latest rally, around 1.0710, from where the pair slowly grinded back higher.

The former rallies repeatedly met selling interest around the 23.6% retracement of the same rally around 1.0925, with short lived spikes above it being quickly reverted.

True, Year End holidays did little to help the pair in establishing a certain trend, but January is about to end and the pair still lacks direction. In the daily chart, a slightly positive tone prevails, given that the price is consolidating above a flat 20 SMA and approaches to the 38.2% retracement of the mentioned rally, at 1.0790 that has continuously attracted buying interest. In the same chart the technical indicators aim slightly higher, but within neutral territory, while the 100 SMA caps the upside.

At this point, the pair needs to extend beyond 1.1000 to have a bullish chance following the ECB, and advance up to the 1.1060 high. Should the rally extend beyond this last, the next bullish target comes at 1.1120, a level that will likely be reached before the week is over.

A break below the base of the range at 1.0790 on the other hand may see a retest of the mentioned lows in the 1.0710 region, leaving the pair then, poised to resume the long term bearish trend.

Sources : fxstreet
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