Free Profitable Forex Newsletter
Hey! This is Philip with this week's Forex market update and trading guide of the Free Profitable Forex Newsletter!
In a relatively light week with no other major market-moving events scheduled on the calendar, for the Euro this week, it was all about the ECB meeting. Forex traders have their eyes on the ECB meeting today, and not surprisingly, we have only seen quiet price action ahead of the event for the whole week, even across most Forex pairs.
It may not be so easy for the bears to push EURUSD lower
The Euro is already down modestly this week - driven by expectations for the ECB to deliver a powerful easing package and a strong dovish message tomorrow. Our trade idea from the last week that we shared here was based on these expectations. It is now in profit, although preferably EURUSD would have been trading even lower by now.
The fact that EURUSD is resilient gives us reasons to be cautious into the meeting today. If for nothing else, because the current price is near our entry point going into a very high-risk event. Nonetheless, we are holding short EURUSD exposure into the ECB meeting, but of course, standing ready to close the trade should the ECB surprise, and if EURUSD shoots up instead of dropping lower.
The technical picture is clear, which will help to determine whether the initial price reaction is genuine or fake.
A breakout above the 1.1030 - 1.1080 resistance would mean that the bulls have taken control. On the other hand, if EURUSD takes out the 1.0925 lows, then a further decline lower toward our 1.0850 target will be more likely.
To use our same chart from last week’s newsletter, here are the likely scenarios for EURUSD around and after the ECB meeting:
The ECB faces mounting pressure to provide stimulus, but it may not be that simple this time around
The EU economy has continued to decline at a steady pace, and fears for a recession have intensified, especially over the summer as the decline in the German economy deepened. Thus, the calls for the ECB to act have only been getting louder and, at this point, there are few options that the central bank has other than to act and deliver on those calls.
However, this could very well turn out to be one of the more difficult ECB meetings to trade given the complicated situation for the ECB overall.
- First off, the ECB doesn’t have much policy room to provide stimulus. This complicates the situation by itself and makes the job of making a decision more difficult because there is wide disagreement among the ECB Governing Council members.
- Second, current President Draghi is on the exit, and this is one of his last two meetings before he hands over leadership to Christine Lagarde. There is speculation that the ECB will avoid making huge decisions (such as QE) ahead of the leadership change in order to avoid putting the new ECB President in a difficult situation even before her term begins.
- Further, the Governing Council of the ECB seems to be divided on how much easing is needed. The hawks think it is too early to provide powerful easing while the doves are in favor of battling the slowing economy as soon as possible. It seems that the odds are tied between the hawks and the doves within the bank - making it difficult to forecast their actual decisions and making big ECB surprises today more probable.
In the end, the only sure thing is that there will be lots of volatility in EUR pairs. But, calling the direction based on what the ECB decides is definitely not something that can be said with confidence for this meeting.
What is expected, and how would EURUSD react?
Economists are expecting a 10 or 20 bp rate cut and a restart of QE at a pace of 20B per month or more. This is also what is roughly priced into the Euro, and if the ECB delivers in line with these consensus expectations, then we’ll probably get a neutral and muted reaction in EUR pairs.
EURUSD is likely to remain heavy, but a lot is already priced in. To get the Euro down the ECB will have to go big - deliver more, perhaps a bigger rate cut and a bigger monthly QE package. However, even in that scenario, the decline in EURUSD is likely to remain gradual, as is the already existing downtrend.
Since it is less probable, the stronger reaction is likely to come on the bullish side, if the ECB disappoints and doesn’t provide as much easing this time as markets expect. However, this is unlikely - that they will risk disappointing the markets. So, the most probable outcome is still for EURUSD to continue drifting lower slowly, in line with the ongoing trends.
Stay focused and vigilant today and good luck trading!
Trade signals from the past week
• September 05, 2019 - Short EURUSD from 1.1040, currently in profit (in progress)
TOTAL: 0 pips in the past week
TOTAL: +1550 pips profit since October 1, 2018
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