EURUSD Higher Ahead of ECB Rate Decision

by on December 4, 2013 12:44 am BST

The euro bounced off the 1.3530 support as forecasted after price action broke the 4H wedge (check out here). EURUSD retraced ahead of the rate decision by the European Central Bank (ECB) that will take place December 5.

It is speculated that the central bank will not further decrease the benchmark rate, but information surrounding potential negative deposit rates could be another way the ECB tries to spur economic growth through lending. Some criticism came out from board members about the negative deposit rates. Keep in mind, last month’s 25 bps rate cut took the market by “surprise.” And the EURUSD has battled back to levels prior to the rate cut.

Given the current risk-on mentality (potentially soon to end) is what is driving the euro higher. I suspect the ECB will need to be aggressive and do drastic measures to cut the legs from underneath the EURUSD move upwards.

Most recently,eurozone unemployment still stands above 12 percent with youth unemployment increasing to 24.4 percent. There are no jobs being developed, which means there is less consumer spending to spur demand.

Fundamentals point to a lower euro, but Draghi may have to force it lower. A cut in rates through the deposit or benchmark will send the EURUSD to support at 1.3470, and a breech to 1.3420 is not out of the question.

However, a favorable decision for the euro could send it to revisit daily resistance near 1.3620. It will be important to follow the press conference as Draghi’s language will be just as important. Look for him to try and talk down the euro.

Look to where price action closes. Buying at the bottom of the range, or selling at the top, could indicate a short lived movement.

1D Chart of EURUSD

1D Chart of EURUSD

4H Chart of EURUSD

4H Chart of EURUSD (posted with wedge analysis on 11/29)