#1) ECB
The ECB might not cut rates on Thursday but policymakers won’t sit idly by as deflation risks grow. There will be threats of further action that carry credibility. The best way for Europe to spark exports, growth and inflation would be with a weaker currency. Draghi & Co. aren’t going to sit around the table and ways to discuss a weaker currency but Mario has shown many times an ability to subtly talk down the euro.
#2) Technicals:
The euro is soft on a few fronts. On Monday, EUR/USD broke below the 61.8% retracement of the Nov-Dec rally. Today EUR/GBP is flashing a potential evening star. EUR/USD is a trickier read but the break of the 100dma, a messy head & shoulders and the fall below the January lows are all negative signs.
EURUSD technical analysis
#3) Positioning:
The best ideas we have of how the market is positioned is via the CFTC report. Speculators have been long since October and last week’s report showed EUR positioning at +14K. Most of those longs likely covered in the past week but that leaves plenty of room for bets against the euro if/when it breaks down
#4) Quiet market:
One of my favorite lessons to repeat is to watch a quiet market. In 2012 traders derided USD/JPY as an intolerably boring pair. In 2013, traders deleted their USD/CAD charts thinking it would never move. Have you noticed how quiet the talk on the euro has gotten lately? The biggest moves come from the quietest markets. That doesn’t necessarily mean a move down or a move right away but it pays to watch when others are sleeping.
Honorable mentions: Continued trouble at European banks, Reversal of safe haven emerging market flows
This is the bearish case for EUR/USD, the other side would argue that European growth is starting for a very low point and with break-up fears eliminated the upside is fertile. The knee-jerk on the lack of ECB action is also a case for longs. Be ready for anything when Draghi meets and go with the momentum. I’ve been talking about EUR/USD shorts for a week and ultimately, I believe it’s headed lower.
