EUR/USD trading strategy:
Trading strategy: Long
Open: 1.1320
Take profit: 1.1500
Stop-loss: 1.1230Analysis: We used yesterday’s EUR/USD drop to open a long position at 1.1320. The EUR/USD is back above 7-day exponential moving average (1.1354) and 23.6% Fibo of September-November fall (1.1357). The target is at 1.1500. In our opinion Thursday’s ECB statement will not weaken the EUR/USD structure as many bad news have been already priced in and downward revisions to macroeconomic forecasts will not surprise the market.
When the Governing Council of the ECB meets this week, it will be facing a less favorable growth outlook, no signs of core inflation trending higher and nervous financial markets. The truce between the US and China will buy time but does not fundamentally ease trade concerns, while in Italy the situation remains fragile with sovereign spreads still very wide and the economy flirting with recession. Recently, the only unambiguously good news has been the sharp drop in oil prices, mainly supply-driven, which will contribute to supporting eurozone economic activity in the coming months at a time of intensifying downside risks.
This assessment is likely to be reflected in a more cautious tone by ECB President Mario Draghi and in the ECB’s updated macroeconomic forecasts, which will probably show a downward revision to GDP growth for 2019 and 2020 from 1.8% and 1.7%, respectively, to somewhere in the 1.5-1.7% range. The latest data have confirmed that the ECB’s projections for core inflation remain too optimistic; the possibility of a further slight downward revision there, together with lower oil prices at the cut-off date, pose downside risks to the inflation forecast for the next two years, which currently stands at 1.7%. Numbers for 2021 will be published for the first time and they will probably show GDP growth settling at about 1.5% (broadly in line with the estimated potential growth rate of the economy) and inflation at 1.7-1.8%. It should be considered that some of the recent slide in oil prices occurred after the cut-off date used to determine the exogenous inputs to the ECB’s models. Therefore, the new forecast numbers will not fully reflect the scale of the correction in oil prices.
Easing growth and weak core inflation raise the risk of a bold dovish change in the rate guidance, for example one that pushes the timing of the first rate hike from after next summer into 2020. We see a 25% probability of this happening on Thursday.
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