EUR/USD Consolidating Ahead of ECB

EUR/USD failed a recovery attempt in Tuesday’s trading as the pair advanced to 1.10263 for a high, but dipped lower following the bounce on upbeat U.S. consumer price index data and came within striking distance of the recent lows. The downside was capped as CPI showed underlying inflation moderated slightly, prompting markets to reduce bets on a rate hike before the end of the year. As of Tuesday’s close, Fed Fund futures were indicating a 65% chance of a rate increase at the December meeting, down from 69% as of Monday’s close.

The pair is attempting another recovery in this morning’s trading, and is currently up 0.19% over yesterday’s N.Y. close, holding near the 1.100 level. With the European Central Bank policy meeting on tap tomorrow, price action has the potential to remain rather muted and within the boundaries of what is now a trading range defined by the 1.10263 level and the recent lows at 1.09660.

This is a particularly important meeting for the ECB, as there is only one additional meeting prior to the end of 2016. Interest rates are expected to remain unchanged for a fifth straight meeting. However, there will be an important focus on the bond-purchase program, which is due to come to an end in March 2017. Investors have become increasingly nervous about what transpires after that date. European Central Bank President Mario Draghi made little in the way of notable remarks following the last meeting, and it will be difficult to maintain such a posture with only one meeting left in the year. Positive comments could help establish a short term bottom in EUR/USD.

However, given the recent breakdown in EUR/USD on both a daily and weekly basis, rallies in response to the ECB activity tomorrow would be viewed as a selling opportunity unless evidence that a sustainable low has developed begins to emerge. At present, it appears the recent consolidation has merely been in response to the extreme oversold condition, which developed as a result of the protracted slide into the October low. The pair fell 2.4% throughout the first half of the month.

On the upside, above first resistance at 1.10263, the next level to watch is at 1.10584, a corrective top established on the 4-hour chart that represents a test of the former support defined by the August 5th reaction low. A sustained move above this level is required to suggest a sustainable low has been established and new buying is warranted. A mere reaction to an oversold condition should not be enough to lift the pair above this significant area of overhead resistance, at least on a sustained basis.

On the downside, key support is at the recent lows, which represent a test of the July reaction low at 1.0952. On a drop below this level, the target becomes the spike low established following the June Brexit referendum at 1.09119, followed by the late February/early March reaction lows at 1.08222.

EUR/USD: Daily/4-Hour Charts


Tracy L. Morganthall, CMT, has been a Technical Market Analyst for more than 20 years. She has experience analyzing and producing reports on equities, both domestic and international markets, as well as Forex and commodities. She attended Trenton State College in Trenton, New Jersey, earning a Bachelor's in Finance.