The ECB rate decision and US inflation are due today, and we will soon find out the impact on the euro and the US dollar pairs.
Today is the most important trading day of the week. Traders and investors alike have watched financial markets moving in tight ranges, waiting for the European Central Bank (ECB) to deliver its monetary policy and for US inflation data.
The ECB’s decision and the US inflation data are issued within a time span of about forty-five minutes, so rising volatility is a given.
The euro has traded with a bid tone since the start of April, led by the EUR/USD exchange rate. But it is unclear if the bid tone behind the euro is due to the ECB’s relative hawkishness or the US dollar’s ongoing weakness. Today’s price action should solve the mystery.
Equities remain close to their highs, and the focus on main stock market indices is to see their reaction to possible tapering talks/warnings from central bankers. The taper tantrum seen in the aftermath of the 2008-2009 Great Financial Crisis is vividly remembered by market participants and policymakers alike, thus something to avoid, if possible.
The crude oil price is the star of the week so far. Yesterday, it traded above $70, fueling inflation fears and reflecting the ongoing global economic recovery.
Expect ranges and the slow price action to dominate until the ECB delivers its decision. The focus is on how it balances the asset purchases between the APP and PEPP programs. Also, forty-five minutes later, the ECB staff projections on inflation and economic growth are destined to move the euro markets.
At the same time, the US inflation data is expected to increase on a monthly basis by 0.4% on the headline release and by 0.5% on the core data. Any deviation from the forecast will move the dollar, as the market participants became extremely sensitive to inflation data during the last months.
Markets to Watch
Dax index, EUR/USD, EUR/JPY– markets in focus today.
The German index forms a rising wedge pattern and is only able to make marginal higher highs. Such price action is typical near tops, but the market may also form a running triangle. Bears may want to see a close below 15,250 as a confirmation of the rising wedge pattern. On such a move, typically, the price action that follows fully retraces the wedge.
The moment of truth for the euro pairs has arrived, as the ECB is due to deliver its monetary policy statement today. The technical picture suggests more weakness possible for the EUR/USD pair on a daily close below 1.21, as traders will try to push it toward the round 1.20 level.
The EUR/JPY cross pair forms a possible head and shoulder pattern, as it had a hard time passing the 134 area. A close below 132.50 puts more pressure on the cross, with bears favouring a move back to 130.
Winners and Losers
The US dollar remains weak, albeit it tries to carve a bottom. US equities are strong, trading close to the highs.