Thursday, July 26, 2018

Euro's Outlook Ahead of the ECB Meeting

  • Euro
  • European Central Bank

Things are looking good for the Euro ahead of today’s ECB Monetary Policy meeting and Press Conference. This week’s economic data releases and political developments have paved the way for a rise above 1.17.

On Tuesday, the market witnessed mixed economic data with the Eurozone Manufacturing PMI rising above expectations to 55.1 while the Services PMI dropping more than expected to 54.4. The mixed PMI releases left the currency unfazed in anticipation of the next day’s German Ifo Business Confidence release.

The German Ifo was released and strength started to build up for the Euro as the figures beat expectation by printing at 101.7 relative to the expected 101.5. The higher than expected reading means that German companies are more pleased with their current business state signaling positivity in the general German economy, the largest economy in Europe.

Later during the day, U.S President Trump and the President of the European Commission, Jean-Claude Juncker met to discuss trade politics between the U.S and Europe. The outcome of the meeting was positive for both countries and positive for the Euro currency specifically with the two leaders announcing that they will work together to ease the trade tensions. They both agreed to not escalate trade tensions and to not impose new tariffs. Moreover, they also stated that they will work towards resolving the steel and aluminum tariffs which sparked the trade war issue in the first place. Adding to the positivity and most importantly, the two front-runners agreed to work towards “zero tariffs, barriers and zero subsidies on non-auto industrial goods”.

The relatively good economic data from Europe coupled with the easing trade war rhetoric points towards a hawkish ECB today. This falls in line with Draghi’s latest speech earlier this month in which he delivered a bullish assessment of Europe’s economic stance and future. Furthermore, during Draghi’s speech he cited the economic risks associated with a potential trade war between the EU and the U.S but given that things have now eased from this end, we expect Draghi to be even more hawkish than at the beginning of this month.

As such, a hawkish ECB delivery will not only maintain the Single currency above 1.17 but will potentially push it up beyond 1.18. From a technical standpoint, the shared currency has to overcome the 1.1750 highs in order to extend its rally higher. Should we see a move above this resistance, then buyers should make an appearance and short-sellers will close off any short-term Euro shorts further pushing prices to the upside. For charting aficionados, the 4-hour chart reveals an inverted Head and Shoulders pattern having formed and its “neckline” is found at the 1.1750 level, the area we highlighted as the key point to be overcome for the Euro to move higher. An extension of the recent rally highlights the 1.1820 level as the first target to look for.

Euro ECB