The ECB is widely expected to leave all three key interest rates unchanged at tomorrow’s meeting. Markets are pricing in a very high probability that the deposit rate remains at 2.25%, with the focus shifting almost entirely to President Christine Lagarde’s press conference and any clues about September.
What is expected?
Decision (8:15 AM ET / 12:15 GMT)
- Deposit Facility Rate: 2.25% (expected unchanged)
- Main Refinancing Rate: 2.40% (expected unchanged)
- Marginal Lending Facility: 2.65% (expected unchanged)
Why is the ECB expected to pause rates?
- Inflation has eased from earlier highs but remains above the ECB’s 2% target.
- Growth across the euro area remains sluggish.
- The recent surge off the declines in oil prices due to increased Middle East tensions creates upside inflation risks, but policymakers are likely to wait for more data before acting again.
- The ECB already raised rates in June and is expected to assess how those tighter financial conditions filter through the economy.
What will traders focus on?
1. September guidance (most important)
Markets want to know whether Lagarde continues to leave the door open for another rate hike in September. A more confident inflation outlook would be euro-positive, while emphasizing growth risks could weigh on the euro.
2. Energy prices
The renewed jump in crude oil following Middle East tensions has complicated the inflation outlook. Traders will listen for whether the ECB believes higher energy costs risk spilling over into broader inflation.
3. Data dependence
Expect Lagarde to stress that future decisions remain meeting-by-meeting and data dependent, avoiding any firm commitment on September.
What about the technical picture? What is the roadmap for traders?
Technically, the EURUSD remains largely “snookered,” with support and resistance keeping price action trapped in an exceptionally tight range. Since June 26, the pair has traded between 1.1362 and 1.1482, a span of just 120 pips despite nearly a month of trading. In fact, you have to go back to 1984 to find such a prolonged period of low volatility for the pair.
The good news for traders is that markets rarely stay this quiet forever. Extended consolidations eventually give way to trending moves. The challenge is identifying which side wins the breakout.
On the hourly chart, the prolonged sideways action has caused the 100- and 200-hour moving averages to converge, with both currently sitting near 1.1423. The pair broke below those moving averages on Monday, retested them yesterday, and again found sellers near the same levels today. As a result, the short-term bias remains modestly bearish while the price stays below those trend-defining averages.
Those moving averages now serve as the market’s immediate barometer. A move back above them would shift the near-term bias in favor of the buyers, while remaining below keeps sellers in control.
The longer-term range boundaries are equally important. With the pair currently trading near 1.1410, support at 1.1362 sits just 48 pips lower. A sustained break below that level would increase the bearish bias and open the door toward the June low at 1.1323.
On the topside, a move back above the converged moving averages would target the 38.2% retracement at 1.1462, followed by last week’s high at 1.1482. Those resistance levels are only about 50 to 70 pips above current prices.
In other words, while the EURUSD appears to be going nowhere, it actually doesn’t have to travel very far before a meaningful directional move begins. The roadmap is well defined.
The wildcard is Thursday’s ECB rate decision. Expectations are for policymakers to leave rates unchanged and avoid any major surprises, which could produce more of the same range trading. However, markets are built to move, and periods of unusually low volatility often precede larger directional swings. The EURUSD has been unusually quiet for weeks. Whether the ECB provides the catalyst or not, traders should be prepared for the possibility that this long period of consolidation is nearing its end.
This article was written by Greg Michalowski at investinglive.com.