EUR/USD: All Wound Up ahead of ECB Meeting

March 6, 2018

4 min

Table of contents

The EUR/USD has been winding up inside a trading range driven by shifting ECB and FOMC outlook. While the fundamentals are skewed toward dollar strength, growing expectations the EU economy is gaining traction and the ECB will begin to tighten policy have supported the euro. Oddly enough, the same data supporting the USD is also helping to support the EUR as economic strength in the one nation leads to the same in the other.
The first big hurdle for the market this week will be the ECB meeting. There is a lot of economic data due out, for both the EU and the US, but they are not likely to move traders to action. The ECB is not expected to alter policy, but they are expected to give some clues in the policy statement. The market has been a little confused by some recent comments from Mario Draghi, a little clarification will help alleviate that. What traders are looking for a shift away from QE toward policy tightening that could lead to a rate hike later this year or perhaps in early 2019.
Such a shift would be euro-strong and may spark rally. At least until the next day’s US non-farm payrolls and unemployment data. The last month’s report showed average job creation, a net-positive for the economy, and steady unemployment at historic lows. This month the expectation is for robust job gains in the range of 240,000 and a down-tick in unemployment. While these data points will be important for the market the more important figure will be the average hourly earnings.
The last month’s average hourly earnings spiked to 2.9% YoY. The second time in the last twelve months that has happened and the third time in the last two years. The spike sparked a massive sell-off in equities and the EUR/USD that the pair has still not recovered from. The reason it did this is because it is a sign of mounting inflation within the broader economy and added impetus for the FOMC to raise interest rates. If the data is strong again I would expect to see the Dollar Index rally and the EUR/USD to move lower.
The daily chart shows a pair trading timidly at the start of the week. It is hanging just below the mid-point of the trading range but also supported by the 30-day EMA, two key levels for this week. These levels may dominate trading up to and until the ECB meeting with a chance of volatility following. A break above either is significant for traders because it will likely lead to tests of support or resistance. A move above 1.2360 could go to the top of the range, a move below the moving average could go to the bottom of the range.
EUR/USD to move lower
The weekly chart looks bullish. The pair has been trending up for the last 14 months and is now forming a bullish flag continuation pattern. Price action last week bounced off support at the bottom of the range and has the pair set up to move higher. The caveat is the indicators. The indicators are both still pointing lower.
EUR/USD flag pattern example
This is consistent with another test of support but also set-up to fire trend following bullish signals with a break above the 1.2600 resistance line.

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