ECB preview: Draghi to drive euro weakness

With the latest ECB meeting approaching, there is a good chance we could see Draghi drive the euro lower once again.

Thursday sees the European Central Bank (ECB) return to the forefront of investor’s minds, and whilst we are seeing little to tell us that we will see a shift in policy from the central bank, market volatility is likely to be heightened once again. The deterioration in data over recent months has much to do with the demise of US-EU relations, with targeted tariffs on products such as German cars meaning that business (and confidence takes a hit, in turn impacting investment. Consumer behavior is also likely to be affected, with employees in those affected industries expected to refrain from large purchases given the uncertainty over their employment. The economic decline in the eurozone has been evident throughout the first half of the year, with expansion in services and manufacturing sectors slowing through much of that six-month period. Interestingly, today’s purchasing manager’s index (PMI) surveys have seen a significant shift in that trajectory, with a sharp rise in German manufacturing in particular providing a welcome boost. Today’s figures showed a steep rise in input prices, with Chinese imports likely to drive up inflation.

The inflationary impact of tariffs on Chinese goods could have an impact on eurozone consumer price index (CPI) going forward, potentially putting pressure on the ECB. With the headline rate standing at 2%, it is clear that the committee is mainly focused on the economic anxieties over price pressures for now. Much of that rise in CPI has been attributed to rising energy prices, which are unaffected by ECB monetary policy. Therefore perhaps the focus should be upon the core reading, which ticked lower to 0.9% this month; some way off the 2% target. With the ECB’s preferred measure (5y5y inflation swap) is somewhere between 1.7% and 1.8% for the past year, there is little pressure on Mario Draghi, president of the ECB, to act.

Talking of Draghi, he has been known to talk down the euro at each opportunity, even managing to do so when laying out the pathway for the end of quantitative easing (QE) last month. With that in mind, we are unlikely to see a particularly hawkish stance from on Thursday. There is no update required for the QE pathway, and he is unlikely to lay out the pathway for a rate rise anytime soon. This provides a potentially dovish tone for the meeting, thus pointing towards downside for the euro.

The monthly chart for EUR/USD points towards a bearish long-term picture coming back into play, with the fall below $1.1554 pointing towards further downside to come. The confluence of the 200-month simple moving average (SMA), 61.8% Fibonacci, and trendline resistance points towards the potential for a resurgence of the downtrend in play since 2008. With the price consolidating near that $1.1554 level, we are watching for either a rebound or breakdown. Thus should we see further weakness, the ability to break below $1.1554 (and $1.1509) would be key to signaling another strong move lower from here.

The four-hour chart highlights that we have been trading within a symmetrical triangle formation over the past month, with the price rallying into the top boundary once more. This points towards a potential turn lower in the near future, where a rally through $1.1750 would signal a possible bullish breakout coming into play. Until then, there is a strong possibility of a bearish move coming into play, if only to continue this short-term consolidation phase.

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