ECB preview: can Draghi talk down EUR/USD after bullish breakout?

EUR/USD is breaking higher ahead of Wednesday’s ECB meeting. Can Mario Draghi talk the euro down after an inverse head and shoulders break?

Wednesday sees the European Central Bank (ECB) return to the fold, with Mario Draghi back in focus in the wake of further economic strife throughout the eurozone. Taking place a day ahead of the usual Thursday, it is likely that this will provide one of the only oddities of the meeting, with many expecting to see a relatively calm event.

ECB meeting unlikely to see major shift in policy

The last ECB meeting saw the committee change their forward guidance to push back their expectations of a rate rise into 2020. They also announced a third round of targeted longer-term refinancing operations (TLTRO) liquidity measures, aimed at reducing the risk for Italian banks. The decision to hit markets with a double whammy highlights why we are unlikely to see any major shift in tone or policy this time around.

Further details of those new TLTROs are likely to be announced at some point in the coming months, yet it is likely that such details will come in June. In any case, such an announcement is unlikely to make a material impact upon markets.

The bank remains reliant upon data given the downward trajectory of inflation and growth. Unfortunately, that trend has been maintained since the March meeting, with both core and headline inflation falling, alongside the ECB’s preferred 5Y5Y inflation swap measure of inflation expectations. Add to that a steep decline in eurozone key manufacturing purchasing managers index (PMI) surveys and it is clear that the bank is likely to be in a similar situation to that seen a month ago.

How will the ECB meeting impact EUR/USD?

The theme is likely to be one of patience, with falling inflation likely to hinder any rate increases for some time yet. The risks as always remain geared to the downside, yet the question is whether we see Draghi go any further than that in a push to drive the euro lower.

The EUR/USD chart below highlights the current position we find ourselves in, with the sharp declines of late March looking likely to be reversed. The prior break through $1.142 resistance signaled a potential bullish reversal coming into play, with a subsequent higher low looking likely. While the price came close to that $1.1176 level, it was never breached. We are now seeing a base form for the pair, with a growing likeliness of a bullish reversal.

On the four-hour chart, there is a clear inverse head and shoulders in play, with the break through $1.125 having activated that bullish pattern. Instigated by last weeks fleeting rise through that $1.125 swing high, we are seeing the intraday trend of lower highs and lower lows negated as we put together a bullish reversal formation. As such, look out for further upside from here, with a drop below $1.1206 required to negate that bullish outlook.

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