Thursday, November 26, 2020

EUR/USD may have some limited downside on the release of the ECB’s monetary policy accounts

  • Dollar
  • Euro
  • European Central Bank


Analysts’ Pick: EUR/USD may have some limited downside on the release of the ECB’s monetary policy accounts

  • Traders to scour the ECB’s minutes for signs of monetary policy easing; we expect dovish statements on its TLTRO and PEPP programs to set up an easing cycle in December
  • Vaccine news is unlikely to complicate the ECB’s decision in December since its economic impact will likely only be felt towards the middle of 2021
  • EUR/USD may have some downside on the release of the minutes that may be over-emphasised by profit taking in the market
  • Downside will likely be floored by a bullish medium-term outlook for euro remains against the dollar

The European Central Bank's (ECB) October monetary policy meeting minutes will be the highlight today as it will likely remain a relatively thin trading day with traders in the US out for the Thanksgiving holiday. October's monetary policy meeting featured no changes to the ECB's policy toolbox, but explicit signals from the central bank's introductory statement and ECB President Christine Lagarde on potential stimulus come December's meeting suggests that traders today will be looking at the meeting minutes for indications on what and how much to expect. With the European economy experiencing a severe drop-off in economic activity after the most recent wave of the pandemic.

Economic activity in major European economies suffered a large drop off following relative to advanced economies following renewed lockdown restrictions


To get a better perspective of the economic damage that has already been done in the wake of the recent surge in Covid-19 infections in the bloc, Markit's flash PMIs for November in both Germany and France slowed to more than two-month lows. Germany's Services and Manufacturing PMI reached a six-month and two-month low respectively in November while France's slowed to a six-month low for both sectors. The aggregated flash PMI for the Eurozone for November was no exception with the flash services sector PMI reaching a six-month low while manufacturing (support by German manufacturing) fared better at a three-month low. Considering that the German manufacturing sector has largely been spared from restrictions in the country, the slowdown in the expansion in that sector is still a signal that demand likely slowed following renewed lockdown measures. Front facing services were probably the most impacted by the restriction, signalling that an imbalanced economy will likely continue as well=.

Services sectors across the EU showed largest drop off in PMI while manufacturing manages to avoid some of the impact from renewed restrictions


With the ECB's Pandemic Emergency Purchase Programme (PEPP) set to have about 800 billion euros for 2021, we expect an increase in December, possibly by 450 million euros to a total envelope of 1.8 billion euros with an extension to the end of 2021 instead of the current deadline of June 2021. The meeting minutes as a result may show policymakers’ preference of this tool. While recent positive vaccine developments has likely caused some complications on a solid decision from an easing cycle from the central bank, we expect policy makers to err on the side of caution especially since global leaders has been mostly conservative on the positive economic impacts of a vaccine more likely to only materialise towards the middle of next year. This would include Lagarde as well since her comments that "the key challenge for policymakers will be to bridge the gap until vaccination is well advanced and the recovery can build its own momentum" mostly coincides with sentiment. An additional outlet for the ECB to ease would be its Targeted Longer-Term Refinancing Operations (TLTRO) program which aims at reducing longer-termed borrowing costs of banks. In this case, the central bank may signal a consideration to extend the term of the TLTRO program until the end of 2021, from the current deadline of June 23rd, 2021.

Consequently, we see some weakness in the euro on expected dovishness in ECB's monetary policy accounts for October's meeting. In terms of EUR/USD, that may be a possible reversal in the short-term after retesting a resistance level at 1.1951, possibly closer towards 1.1812’s level. Still, in the medium-term the dollar is expected to weaken with the euro expected to benefit as institutions move to hedge against the greenback on expected losses post-2020. This would mean that weakness in the euro in the short-to-medium-term is likely to be limited, and the upward trend may continue albeit at a slower rate that what we've seen since October as most positive developments for the euro is probably mostly baked into its price.

Technical Analysis:


Euro bulls continue to dominate the currency despite the initial dip towards the end of October in anticipation for the US elections. RSI is signalling that the currency pair is starting to approach overheated levels, which in our view may result in some limited downside with the ECB’s minutes as a catalyst. A likely resistance level at 1.1951 is likely to further exacerbate this as well as traders step out of long positions to take profits. Medium-term fundamental and technical analysis still suggests that the EUR/USD is in an overall uptrend, which will likely be fuelled by the weak outlook for the greenback.  The European economy does face some headwinds moving into 2021 however, which may suggest that the upward trend may start to show signs of easing.

Support: 1.1951 / 1.1993 / 1.2103

Resistance:  1.1759 / 1.1703 / 1.1614

EUR/USD Chart (H4)