Summary:

  • the ECB will not change rates on Thursday but markets wait for guidance update from Draghi
  • EURUSD seats at the fence, waiting for a break or bounce of 1.22
  • DE30 turned south, could use weaker euro  

ECB has reasons to be cautious

A recent resilience of the euro could be spotted maybe not so much against a re-surging US dollar but against some other currencies like AUD, JPY oraz the CAD. The euro has been buoyed by comments from some officials like Yvesch Mersch or Vitas Vasiliauskas who underlined strong growth and trust in a return of inflation to the target. 

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European growth has shown signs of exhaustion so far this year. Source: Macrobond, XTB Research 

Are the markets prone to be disappointed? The latest data could suggest a more dovish ECB take. Take a look at inflation that rebounded much less than expected in March (initially released at 1.4%, then revised to 1.3% y/y) and core inflation stayed at 1% despite more favorable base from last year. And growth, once a pillar of confidence within the ECB board, has shown some warning signs as well – manufacturing PMI slid for the 4th straight month in April. Add Trade War risks, rising bond yields due to higher oil prices and increased volatility on the markets and you have a mix where the ECB might definitely want to avoid any hawkish remarks. Besides the next projections are due in June so even if the ECB wants to communicate a shift in guidance it should wait until the next meeting. 

EURUSD – seating on the fence

The technical outlook for EURUSD is deteriorating. The pair has already broken out of the upwards channel and the last support preventing a major correction similar to those from Autumn 2017 is just being tested. A correction of that sort would drag the pair below 1.20. 

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EURUSD has broken the trend-line and is testing a “last chance” support of 1.22. Source: xStation5 

DE30 – bulls seem fatigued

DE30 rebounded nicely off a double bottom and if you consider a similar move from 2015 (green and red circles) you can see that after a dynamic recovery bears regained control and led to a test of a long term trend line. Obviously this pattern does not need to repeat and even if it does, a bounce could still have some fuel (notice that in 2015 after the first red candle the market was able to rise for another two weeks before eventually reversing lower). We have a combination of trend-line and a 50% reversal of the last wave at around 11000 points. 

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Bulls seem to be struggling after a rebound from a double bottom on DE30. Source: xStation5 

What are others saying:

Bank of America ML: the recent weakness in the Eurozone data has increased risk of a dovish ECB tone

Societe Generale: we still expect to see EURUSD at 1.30 this year but a break of 1.2150 seem likely first and should offer a buying opportunity

Barclays: we expect a dovish tone from president Draghi which could keep the EUR contained for now with room for near-term downside