The EUR/USD sold off on the back of a dovish ECB announcement on the one side and a strengthening U.S. dollar on the other side. European Central Bank policy makers agreed to cut monthly bond purchases in half to EUR30 billion in January but extend the bond buys at this pace until September 2018. While this outcome was exactly what the market has anticipated, Draghi said there won’t be a “sudden end to the buying” and the shift shouldn’t even be called tapering. What weakens the euro was the fact that a “large majority” of ECB policy makers favored keeping the bond buying program open-ended so they can adjust it at any time in case inflation stays sluggish. With regard to future interest rate hikes, Draghi said that rates will remain “at the present levels for an extended period of time, and well past the horizon of our net asset purchases”.
In short, the ECB’s decision can be described as slightly more dovish than euro bulls may have hoped for.
As regards the U.S. dollar, prospects for the U.S. tax reform spurred the dollar rally. The U.S. House passed a budget resolution unlocking a process to cut taxes by the end of the year. The greenback experienced broad-based gains versus other major currencies but the focus now shifts to the third-quarter GDP reading, scheduled for release today at 12:30 UTC. Even though economists are looking for slower growth of 2.6 percent, dollar bulls may take this opportunity to jump back in on pullbacks. Traders should prepare for heightened volatility around the GDP release.
EUR/USD: The euro cleared its crucial support at 1.17 and even 1.1650. After breaking below theses support levels, the case has built up for the bears and we now expect the euro to tumble towards 1.1550 but maybe not straight-lined. Former support levels could now turn into resistances with pullbacks may be limited until 1.17/1.1730.
Only yesterday we have talked about the pound’s bullish break above 1.3230 which seemed to indicate further gains towards 1.33 but the opposite happened: The pound fell in tandem with the euro and headed for another test of 1.3110. If the 1.31-support breaks the previous bull breakout above 1.3230 turns out be a fake-out. In case the cable falls below 1.3085 we anticipate further losses towards 1.3030 and 1.2950.
We wish you good trades and a relaxing weekend.
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