Not Quite “FOMC Day”, But It’s Close

EURUSD Daily 020414

Hi, Friends, Here’s hoping that all is going well. For those who trade currencies, or fixed income, tomorrow’s European Central Bank (ECB) Governing Council meeting may prove to be significant. The rate announcement will be released at 7:45 EST, if I’m counting backward correctly from Central European Time. The press conference with ECB Pres. Draghi will take place 45 minutes later, at 8:30 EST. Inflation in the Eurozone has been running well under 2 per cent, and even Christine Lagarde, head of the IMF, is calling on the ECB to do more in order to avoid a lengthier period of what she referred to as “low-flation”.

Those of us who have been around for a while may still find it a bit confusing to hear central bankers and other policymakers discussing the need for more, rather than less, inflation, but that’s the market we’re working with now. The currency market by and large is assuming that the ECB will respond to the pressure by easing monetary policy further, perhaps moving aggressively. I’m agnostic; I think that I know what the parameters are for Dr. Draghi & Co.’s decision, but within those boundaries, I have no idea what they will announce.

That being the case, I’d be somewhat reluctant to go into the announcement with much of a position.  With that said, a look at the daily chart of EUR/USD, above, shows an extended trading range, which was followed by a fairly steady move higher, which ended at 1.3966. From there, a retracement began that led to last Friday’s low of 1.3704. Friday’s move brought the pair back into moving average support, and I’m inclined to regard 1.37 as a level that will, if broken, lead to some further downside. If I was long EUR/USD, I’d certainly have a stop in place not far below that level.

EURGBP Daily 020414

Another potential play is in EUR/GBP, which has been trending fairly consistently lower.  After finding a floor at.8157 on February 17, the pair rebounded as far as .8399 below tailing off again, with another attempt at a bounce failing, thus far, at the moving averages around .8305. The pullback extended as far as the 61.8% Fibonacci retracement and a bit, making it less likely that the previous high for the move will be retested. Given the longer term trend in EUR/GBP, I’d be inclined to sell on a break below Friday’s .8245 low. 

EURJPY Daily 020414

Another possible play is EUR/JPY, but this one makes me pretty uncomfortable. The Japanese government is committed to doing what it can to keep the Yen weak, and while that doesn’t mean that the Yen will decline against all currencies, every day, it does make it a tougher long. In the case of EUR/JPY, the trend on the daily chart at present is up, but this doesn’t appear to me to be at an attractive purchase point, and while buying a break above the recent high at 143.77 might work, I’d prefer to wait for a pullback.

My sense is that the market is anticipating a meaningful response by the ECB that will pull Euro interest rates lower. That would normally be expected to weaken the Euro, and if the ECB does act, I would expect the initial move to be “Euro down” against most currencies. Still, the ECB has been fairly stubborn, and slow to act; if the announcement reflects no changes, there could easily be a quick move to cover EUR shorts. Another risk is that notwithstanding the initial move, there could be verbiage at the press conference that will cause sentiment and positions to reserve. Again, the presser occurs 45 minutes after the rate announcement.

On balance, it might be easier to wait this one out, but if I was going to carry something into the meeting, short EUR/GBP looks to me to have the best risk/reward ratio among the majors. 

Whatever the outcome, best of luck!