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What to Expect from ECB and Managing EUR/USD Trade

Talking Points:

- EURUSD cracks weekly low and tumbles below $1.2600.

- New EURGBP trade on the table.

- EURUSD has been on a major losing streak since mid-August.

With the ECB’s stress tests due at the end of the month and the ABS-program not yet having begun, it is unlikely QE is announced today. An additional dosage of stimulus now before the balance sheet review is revealed to the public could be damaging to morale; not dissimilar from a patient being administered medicine before being told what ails her – she would be concerned she has a problem.

So as the ECB simply tries to avoid nothing more than a PR blunder, the market will be forced to weigh its demand for additional action versus the acceptability of the timing. After all, the first TLTRO uptake was rather weak, but with the ABS-program due to begin in two weeks and another TLTRO event scheduled for December, there is still stimulus in the pipeline.

To keep the Euro lower then, promises of further action or details regarding the scope of the ABS-program – especially those that make the program seem wider in scope than otherwise thought – will be necessary. Futures positioning isn’t at an extreme anymore (net-shorts -12% overall since week ended September 2), but is still at a point where it could provide some fuel to a short covering rally in EURUSD.

On the other hand, EURUSD remains below its daily 13-EMA which has been trend resistance for the past two months. FXCM’s SSI notes that the retail crowd on balance is net-long EURUSD, and as a contrarian indicator, calls for further losses in the pair. The EURUSD SSI has a solid track record in 2014, having called for gains in EURUSD from January to mid-May, and has been biased short since then.

Read more: GBP/USD Prints Above $1.6230 as ISM Manufacturing Misses Big

— Written by Christopher Vecchio, Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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Bearish EUR/USD Outlook Vulnerable If ECB Attempts to Buy Time

- European Central Bank (ECB) to Announce Further Details Surrounding Non-Standard Measures.

- Will ECB President Mario Draghi Talk Down the Euro?

For more updates, sign up for David’s e-mail distribution list.

Trading the News: European Central Bank (ECB) Interest Rate Decision

Further details surrounding the European Central Bank’s (ECB) asset-back securities (ABS) and covered-bond purchase program may heighten the bearish sentiment surrounding the Euro, but we may see a relief rally in the EUR/USD should the Governing Council use the interest rate decision as an attempt to buy more time.

What’s Expected:

EUR/USD ECB

Click Here for the DailyFX Calendar

Why Is This Event Important:

The ECB may refrain from addressing the unanswered questions surrounding the non-standard measures as President Mario Draghi waits for the results of the second targeted long-term refinancing operation (T-LTRO), and the EUR/USD may face a near-term correction should the fresh developments dampen bets for more easing.

Expectations: Bearish Argument/Scenario

The ECB may sound increasingly dovish amid the growth threat for deflation, and the EUR/USD may face a further decline should the council keep the door open for more non-standard measures, which may quantitative easing (QE).

Risk: Bullish Argument/Scenario

Nevertheless, the ECB may scale back its dovish outlook amid the improvements in the monetary union, and the Euro may face a near-term bounce should the central bank adopt a wait-and-see approach.

Join DailyFX on Demand to Cover the Entire ECB Rate Decision!

How To Trade This Event Risk(Video)

Bearish EUR Trade: ECB Keeps Door Open for More Non-Standard Measures

  • Need red, five-minute candle following the updated foreward-guidance to consider a short EUR/USD trade
  • If market reaction favors a short Euro trade, sell EUR/USD with two separate position
  • Set stop at the near-by swing high/reasonable distance from cost; at least 1:1 risk-to-reward
  • Move stop to entry on remaining position once initial target is met, set reasonable limit

Bullish EUR Trade: Governing Council Tries to Buy More Time

  • Need green, five-minute candle to favor a long EUR/USD trade
  • Implement same strategy as the bearish euro trade, just in the opposite direction

Read More:

Scalping the AUDCHF Reversal- 8360 Resistance in Focus

COT: US Dollar Speculator Long Position is Largest on Record

Potential Price Targets For The Release

EUR/USD Daily

EUR/USD Daily Chart

Chart – Created Using FXCM Marketscope 2.0

  • DailyFX Speculative Sentiment Index (SSI) shows retail crowd remains net-short the dollar, with the EUR/USD ratio current sitting at +1.34.
  • Interim Resistance: 1.3010 (50.0% retracement) to 1.3020 (23.6% expansion)
  • Interim Support: 1.2450 (78.6% retracement) to 1.2500 pivot

Impact that the ECB rate decision has had on EUR/USD during the last meeting

September 2014 European Central Bank Interest Rate Decision

EUR/USD Chart

The European Central Bank unexpectedly cut the benchmark interest rate to fresh record low of 0.05% as the downside risks surrounding the growth outlook raises the threat for deflation. The Governing Council also laid out an asset-backed securities (ABS) purchasing plan to further boost private-sector lending, with details to be disclosed at the October 2 policy meeting. As a result, it seems as though the Euro will face additional headwinds over the near to medium-term as the ECB continues to push monetary policy into unchartered territory. The EUR/USD plummeted following the new wave of monetary support, with the pair dropping over 100 pips during the North American trade, but we saw a minor bounce going in the close as the euro-dollar ended the day at 1.2932.

— Written by David Song, Currency Analyst and Shuyang Ren

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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Commodity Dollars Soar as Risk Trends Gyrate Before ECB, NFP Results

Talking Points:

  • Commodity Dollars Stage Recovery as Risk Appetite Firms Before ECB, NFP
  • Euro to Resume Decline on Strong ECB Stimulus Pledge, Rebound Otherwise
  • See Economic Releases Directly on Your Charts with the DailyFX News App

The sentiment-linked Australian, Canadian and New Zealand Dollars outperformed against their leading counterparts in overnight trading hours. The Kiwi proved strongest on the session, rising as much as 1.4 percent on average against the majors. The Aussie and Loonie added 0.6 and 0.8 percent, respectively.

The move did not appear to be rooted in any single catalyst. Rather, price action probably reflected a shift toward “neutral” on sentiment trends within the FX space as traders braced for the passing of the week’s top event risks. The spotlight initially falls on a policy announcement from the European Central Bank and moves to US Employment figures tomorrow.

The central issue in play is whether the “risk-on” theme entrenched since mid-2012 and arguably driven by generous Fed stimulus is able to survive after the US central bank concludes QE3 asset purchases later this month. For the ECB, that means investors will want to see evidence of a big-enough accommodation effort able to replace that of the US central bank on the horizon.

So far, the markets have been decidedly underwhelmed by the easing measures that Mario Draghi and company introduced in recent months. This is not surprising: uptake on the ECB’s first TLTRO operation fell short of expectations and the central bank’s balance sheet is only a hair above a three-year low. If it is to underpin risk appetite in earnest, the Eurozone monetary authority will have to do far more.

With that in mind, the markets will be most keen to hear details of the ECB’s planned purchases of ABS and covered bonds. Against this backdrop, the overnight swell in risk appetite probably reflects the perceived threat of holding bets against sentiment-linked assets in the event that the ECB delivers. That would mean a commitment to large-scale buying of securities and a strongly-worded pledge to do more if need be. A lackluster outcome may quickly send sentiment-geared FX back down however.

As for the Euro itself, the single currency’s reaction to whatever the ECB unveils may prove to be a bit more straight-forward. The promise of an aggressive expansionary push is likely to sink the unit against its leading counterparts. Alternatively a more modest effort may trigger liquidation on highly elevated speculative net-short positioning and foster a rebound.

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Asia Session

European Session

Critical Levels

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

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Contact and follow Ilya on Twitter: @IlyaSpivak

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Euro Can Reverse Course, Rally if ECB Comes Up Short

Talking Points:

  • Dollar Breaks Pace on the Same Day Risk Slumps
  • Euro Can Reverse Course, Rally if ECB Comes Up Short
  • Japanese Yen: USDJPY Biggest Drop in 6 Months a Signal?

Dollar Breaks Pace on the Same Day Risk Slumps

It is unusual that on a day where risk aversion is prominent enough that it drives global equities lower and leverages volatility across asset classes that the safe haven Dollar would end the day lower. Yet, the greenback has pushed its run so far that a breather is necessary. That is especially true when there is key event risk ahead. Taking stock of the situation, the currency has already pressed its position. Following its best quarter in six years, matching its longest series of daily gains (7) in the same period and still projecting its longest string of weekly gains (11) on record; the Dollar move is mature. Concerns over its persistence leads to indecision as major event risk approaches. The ECB’s rate decision calls a critical contrast to the Fed’s hawkish shift and Friday ‘s NFPs will further shape rate forecasts. In fact, through Wednesday, the USD was up against most counterparts as traders braced themselves for what lies ahead. Yet, the broader downshift in speculative positioning generated more heat for Yen crosses and thereby USDJPY. This outsized move overshadowed the indecision elsewhere.

Euro Can Reverse Course, Rally if ECB Comes Up Short

In the past 5 months, EURUSD has dropped over 1,400 pips from peak to trough. And, much of this move can be attributed to the ECB. As the exchange rate advanced towards 1.4000 and the market showed little sign of relenting under natural market conditions, the central bank moved in to curb the tide. At first President Mario Draghi’s interest in the exchange rate was obtuse with a few offhand comments about its high level. That concern, however, quickly progressed into action when the official linked monetary policy to the currency’s level. Since the link was made, the Euro has been in retreat. With an aim to ease the Euro’s influence on deflation and to help stimulus growth, the group further escalated its effort by lowering rates in June and August (pushing the deposit rate to negative), introducing targeted LTRO loans, halting sterilization of bonds they already held and a range of additional moves. However, on a playing field where other central banks are employing QE (quantitative easing), the market’s real interest was in the ECB’s vow to start an asset purchase program.

At last month’s meeting, Draghi finally confirmed what speculators had expected for months – that they would adopt a stimulus program. He stated that details for the effort would come ‘after the October meeting’. As such, the market is focused on today’s policy gathering in anticipation of a QE course that stands up to what the Fed and BoJ have themselves offered. And, expectations are high. With Draghi already setting out an objective to increase the balance sheet back up to the level it was at in early 2012 (an increase anywhere between €600 billion and €1 trillion), traders have projected a massive effort. Could their expectations be set too high? Given the hefty depreciation of the currency leading up to the event, it is far easier to ‘disappoint’ than it is to ‘impress’. That could turn the Euro and swamp capital markets.

Japanese Yen: USDJPY Biggest Drop in 6 Months a Signal?

Notable changes in key fundamental outlets for the Yen crosses are starting to catch up to the market. We have seen exchange rates long ago diverge from underlying yield expectations for these once-prominent carry trades and the Bank of Japan back away from an upgrade to its stimulus efforts. More recently, the government and business groups have started to up the ante by suggesting the currency’s rapid depreciation was causing economic imbalance. However, these are all ‘passive’ motivators. They remove impetus for further advance for USDJPY and its counterparts. The impetus for an actual change in direction comes from risk trends. With this past session’s Nikkei 225 drop leading global capital markets, the tide recedes and exposes these expensive carry trades. The question is whether risk aversion is here to stay.

British Pound Slips as Manufacturing Weakens, BoE Member Enters Currency Debate

As the focus for the British Pound shifts back to the outlook for interest rate policy, event risk has set an unfavorable tone. This past session, the September manufacturing PMI eased further to a 17-month low, significantly moderating the economic outlook which has been instrumental in bringing forward expectations for the BoE’s first rate hike. Another concern was BoE member Kristin Forbes suggestion that the currency’s level could be masking inflation. She was careful not to insinuate a fair value for the Pound, but a market hypersensitive to this read into it.

Australian Dollar: Not a Good Time to Mount a Recovery

Both the Australian and New Zealand Dollars have pushed for a rebound through early morning trade Thursday. After their respective declines these past weeks, it seems like a correction could be easily facilitated by speculative interests. However, sentiment bearings may be exactly why a rebound effort may be an exceptional risk. If risk aversion is at hand, these carry trades are not in good standing.

Emerging Markets Collapse Further on Heavy Volume

With a drop in global equities, it is not surprising to see riskier Emerging Markets suffering. The MSCI ETF dropped another 2.1 percent this past session to six-month lows on the heaviest volume (109 million shares) since April 15. Amongst the worst-hit currencies, the Ruble cooled its heels with only a 0.2 percent drop (despite capital control speculation). It was the Brazilian Real that was headlining a 1.4 percent drop.

Gold In a Breakout Pattern but Can Risk Trends, ECB Deliver?

We find gold once again wedged between tight technical congestion and heavy, impending event risk. That is the kind of combination that often ends in breaks. One of the metal’s key roles is a viable counterpart to traditional fiat that is distorted by monetary policy. A large stimulus program for the ECB could make gold look appealing. Then again, the dollar has been a ready siphon for outflows for other currencies.

**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

INTRA-DAY PROBABILITY BANDS 18:00 GMT

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— Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

Sign up for John’s email distribution list, here.

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Precious Metals Rebound As US Dollar Loses Steam Ahead Of Jobs Data

Talking Points

  • Gold and Silver Recover Ground As Their US Dollar Counterpart Stumbles
  • Crude Oil At A Critical Juncture With Bullish Fundamental Cues Lacking
  • Platinum Traders Near Multi-Year Low As Technicals Warn Of Further Weakness

Crude oil has stabilized during the Asian session today after suffering another drop in trading on Wednesday. Reports of prices cuts by OPEC producer, Saudi Arabia overshadowed a surprise climb in US inventories for the week. Anticipation over ample global crude supplies remains a dominant driver behind weaker oil prices. Alongside a light US economic docket over the session ahead, the commodity may be left lacking bullish fundamental cues. Nonetheless a consolidation may be afforded given some hesitation from traders near the WTI’s 2014 lows.

Meanwhile, gold and silver are pushing higher in early trading as broad-based weakness for their US Dollar counterpart takes hold. 11 straight weeks of gains for the greenback have left the door open to profit-taking. Furthermore, traders will likely be reluctant to add to long positions ahead of the release of the volatility-inducing US jobs report due on Friday. This in turn may offer the precious metals some breathing room.

Geopolitical concerns may also provide some background noise for the commodities space. Jitters surrounding unrest in Hong Kong may generate some short-term haven demand for gold. However, the potential for these concerns to quickly dissipate suggests the yellow metal will have to search elsewhere for a more sustainable source of support.

Finally, natural gas may be in store for another volatile session after the energy commodity slumped by over 2 percent on Wednesday. Storage figures set to cross the wires today are tipped to reveal an injection of 105.88 billion cubic feet. Another injection above the seasonal average could amplify supply glut anticipation and make a recovery a difficult feat for the commodity.

ECONOMIC EVENTS

Precious Metals Rebound As US Dollar Loses Steam Ahead Of Jobs Data

Source:DailyFX Economic Calendar, Times In GMT

CRUDE OIL TECHNICAL ANALYSIS

Crude oil remains at a critical juncture after being slapped back towards its 2014 low near 90.45. There are warning signs of a potential downside break of the barrier following the emergence of a Bearish Engulfing formation. A daily close underneath the nearby floor could pave the way for a descent on the 2013 low at 85.45.

Crude Oil: Awaiting Break After Being Slapped Back To Critical Support

Precious Metals Rebound As US Dollar Loses Steam Ahead Of Jobs Data

Daily Chart – Created Using FXCM Marketscope 2.0

GOLD TECHNICAL ANALYSIS

Gold continues to endure a consolidation between the 1,208 and 1,222 congestion zone. Yet against the backdrop of broader downtrend a more convincing daily close below the 1,208 floor would open the next leg lower to the 2013 lows near 1,180.

The DailyFX SpeculativeSentimentIndex suggests a bullish bias for gold based on trader positioning.

Gold: Focus To Shift To 1,180 On Break Below 1,208

Precious Metals Rebound As US Dollar Loses Steam Ahead Of Jobs Data

Daily Chart – Created Using FXCM Marketscope 2.0

SILVER TECHNICAL ANALYSIS

Silver’s recent rebound is seen as corrective within the context of a broader downtrend on the daily. Downside risks remain for the precious metal while sub the 17.30 barrier, which keeps the spotlight to the low seen in late March ’10 near 16.50. A daily close over the 17.30 mark would be required to confirm a Harami formation and suggest a small base may have formed.

Silver: Downside Risks Remain While Sub 17.30

Precious Metals Rebound As US Dollar Loses Steam Ahead Of Jobs Data

Daily Chart – Created Using FXCM Marketscope 2.0

COPPER TECHNICAL ANALYSIS

Copper has managed to regain its footing at the 3.01 floor after it failed to post a more convincing daily close below the barrier. While a Harami pattern indicates the potential for a shift in sentiment, it lacks validation from an ensuing up-day. Amid the presence of a short-term downtrend this leaves the base metal to await a break below 3.01 to set the scene for a descent on the 2.96 barrier.

Copper: Awaiting Break Amid Broader Bearish Backdrop

Precious Metals Rebound As US Dollar Loses Steam Ahead Of Jobs Data

Daily Chart – Created Using FXCM Marketscope 2.0

PALLADIUM TECHNICAL ANALYSIS

Palladium is retesting the 61.8% Fib near 780 following the emergence of a Harami formation. At this stage the recovery is seen as corrective rather than indicative of an emerging uptrend. Alongside broader bearish signals a break below buying interest at 765 would open the 76.4% Fib. near 748.

Palladium: Retesting Fib. Level With Core Downtrend Intact

Precious Metals Rebound As US Dollar Loses Steam Ahead Of Jobs Data

Daily Chart – Created Using FXCM Marketscope 2.0

PLATINUM TECHNICAL ANALYSIS

Platinum’s voyage into territory not seen since 2009 has left the precious metal with thin buying interest. Coupled with a core downtrend the stage may be set for further weakness for the precious metal. The close below the 1,285 floor may open up a retest of the 1,260 handle.

Platinum: Primed For Further Weakness Following Plunge Below 1,285

Precious Metals Rebound As US Dollar Loses Steam Ahead Of Jobs Data

Daily Chart – Created Using FXCM Marketscope 2.0

Written by David de Ferranti, Currency Analyst, DailyFX

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Contact and follow David on Twitter: @DaviddeFe

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EURCAD Shorts at Risk Ahead of ECB- Key Support 1.4053

Talking Points

EUR/CAD Daily Chart

EURCAD Shorts at Risk Ahead of ECB- Key Support 1.4053

Chart Created Using FXCM Marketscope 2.0

Technical Outlook

  • EURCAD continues to trade within confines of a descending channel off the March high
  • September opening range remains intact- break to validate medium-term bias
  • Weekly opening range taking shape above support at 1.4053(9/19 Close)- bullish invalidation
  • Support break targets 1.4012, 1.3970 & 1.3855
  • Resistance at 1.4182/91 – bearish invalidation
  • Breach targets resistance objectives at 1.4246, 1.4363/83 & 1.4444
  • Daily RSI divergence suggests downside pressure waning- constructive
  • Multiple resistance triggers in play- bullish
  • Event Risk Ahead: ECB Interest Rate Decision tomorrow

EUR/CAD 30min Chart

EURCAD Shorts at Risk Ahead of ECB- Key Support 1.4053

Notes: The EURCAD weekly opening range has taken shape just below the monthly central pivot at 1.4183 with the range lows coming in just pips of the September 19th close (2014 lows) at 1.4053. The focus will be on a break of this range with major event risk out of Europe tomorrow likely to serve as a catalyst.

Bottom line: the downside bias remains vulnerable here – we’ll favor buying dips while above the 1.4053 threshold with a breach above the weekly opening range high’s offering further conviction on long-scalp exposure. A break sub-1.4053 invalidates our near-term outlook with a move below the yearly lows at 1.4012 targeting subsequent support targets into 1.3855.

Note that we are just opening up October / 4Q trade and we’ll look for the monthly opening range to validate our medium-term directional bias. That said, use caution heading into tomorrow’s event risk with the European Central Bank rate decision likely to fuel added volatility in euro pairs. Follow the progress of trade setups like these and more throughout the trading week with DailyFX on Demand.

* It’s extremely important to give added consideration regarding the timing of intra-day scalps with the opening ranges on a session & hourly basis offering further clarity on intra-day biases.

Key Threshold Grid

*ORH: Opening Range High

*ORL: Opening Range Low

Other Setups in Play:

—Written by Michael Boutros, Currency Strategist with DailyFX

For updates on this scalp and more setups follow him on Twitter @MBForex

To contact Michael email mboutros@dailyfx.com or Click Here to be added to his email distribution list

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