EURUSD Consolidates Near 1.3700; ECB QE Unlikely to Represent the Fed or BoJ

by on May 19, 2014 7:14 am BST

Market participants are witnessing increased bond action due to the weakening economic outlook for many developing countries. The euro continues to consolidate against the greenback underneath 1.3700 as investors sell peripheral bonds. Financial markets are awaiting action from the European Central Bank (ECB) after the eurozone gross domestic product figures were lower than forecasts.

Our arguments for selling euro-dollar remain unchanged,” according to MacNeil Curry, a strategist for Bank of America Merrill Lynch. Curry believes the trend has shifted in the euro-dollar due to a combination of eroding European assets and weak price action. The euro closed the week lower, roughly down one percent against the yen and .5 percent against the US dollar. “There’s scope to build up euro shorts. We see the market starting to positioning last week,” said BNP Paribras FX strategist Vassili Serebriakov.

The sluggish growth and stubbornly low inflation (by central bank standards) has market participants wanting an all-out asset purchasing program by the ECB. Many analysts believe a tinkering with interest rates will not be enough – eurozone growth expansion has been under one percent since 2010.

Draghi & Co. has flirted the idea of various methods of easing, including negative deposit rates to potential asset purchases; but, the central bank has not gone in depth in what or how they would conduct new policy. One thing is for sure, the ECB’s quantitative policy will unlikely resemble programs from the Federal Reserve or the Bank of Japan (BoJ) due to the politics of 18 separate nations under one roof. The German central bank, the Bundesbank, will likely object to an all-out asset purchasing program and will not automatically give support to such measures.

Price action bounced off of support at 1.3647, and the pair was able to reestablish 1.3700 after traders began to sell the US dollar throughout Friday’s session. Price action is still bearish, but the down tick in the – DMI will support a pullback with the RSI to 35.

Topside movement is likely to be limited as resistance levels are layered in. Look for resistance at 1.3740 and 1.3780, while if support at 1.3645/50 breaks, the 200 EMA will be the next level to test before reaching 1.3565.

Price action is currently teetering on a large ascending trend line created on November 7.  If price action can close below this, expect the pair to retest 1.3645/50 before trending lower. However, a close above this could signal more strength and reach the first levels of resistance on a pullback.

1D Chart of EURUSD

1D Chart of EURUSD