Article by ForexTime

Following some dovish comments from Mario Draghi two weeks ago when the European Central Bank (ECB) President teased the prospect of December being the month the ECB would introduce QE, euro bears were on high alert for Thursday’s interest rate decision announcement.

Unfortunately for the bears, they were left highly disappointed when they found out the ECB left monetary policy completely unchanged yesterday. Due to expectations being so high that the ECB would at the very least hint towards QE being on the way in the near future, the EURUSD declined to 1.2281, its lowest valuation since August 2012, as the interest rate decision was announced. However, as soon as investors realized that not only were no additional stimulus measures being introduced in December but it also appeared no further stimulus would be introduced in January either, euro bulls pushed the EURUSD to trade as high as 1.2455. The pair then concluded trading at 1.2370.

It shouldn’t be a major surprise that the ECB left monetary policy unchanged in December, considering Mario Draghi had stressed during previous press conferences that the ECB were very limited in terms of what further action they could take. When you consider the ECB’s ultra-loose monetary policy stance, they already have so many playing cards at the table. Interest rates have been cut three times within the past year, with negative deposit rates also being introduced – since been increased to 0.2%. Asset Backed Securities (ABS) and Long-Term Refinancing Options (LTRO’s) are other examples of the ECB’s loose monetary stance, with Draghi himself stating earlier this week that more time was required before the ECB can review whether stimulus measures have been successful. Even if the ECB wanted to act yesterday, it was largely expected any attempts to do so would have faced heavy opposition, with this likely further preventing the ECB from providing the Euro bears with what they wanted to hear yesterday.

In regards to what happens next for the EURUSD, it would not be a surprise if the pair continues to attempt progressing towards the upside. Traders are now aware that the ECB will not be meeting again to discuss monetary policy until next year and, with traders also being made acutely aware that the ECB are indeed limited towards what further stimulus they can possibly introduce, the euro could be set to enter a recovery period.

Although EU economic releases are likely to continue to cause concern in the meantime, the main driving factor behind the EURUSD falling to the downside will now be increased demand for the USD. In the event investors decide to take profit on the USD in the run up to Christmas, this would highly benefit the EURUSD’s chances of moving to the upside. I would not immediately expect any gains beyond 1.25 though and if the pair does extend beyond here, resistance can be found at 1.2578.

Aside from leaving monetary policy unchanged, the main takeaway from yesterday’s ECB meeting was the announcement of a sharp downgrade of revisions for future economic growth and inflation readings. For example, the forecast for GDP growth in 2015 was previously 1.6% but this has now been revised down to 1%. It was also previously expected inflation pressures would be temporary but looking at the inflation downgrade yesterday, this is no longer the case. Inflation levels for 2015 are now expected to be around 0.7%, considerably less than the 1.1% previously suggested. Overall, this indicates that the EU economic woes are not going anywhere anytime soon.

The revised lower projections could also soften the views of those who currently oppose further ECB stimulus from being introduced, meaning further action from the ECB could be on its way in early Spring.

In the meantime, the EURUSD will be at risk depending on how the markets react to this afternoon’s US Non-Farm Payroll (NFP) release. Considering we are in the month of the holiday season, USD bulls will be hoping for a strong employment number. Any figure beyond 250,000 would be seen as impressive and likely pressure metals and commodities, alongside currency pairs such as the EURUSD. If increased demand for the Dollar pressures the Euro today, the EURUSD can find support at either 1.2358 or 1.23. However if the US NFP figure encourages investors to take profit on the USD, the EURUSD extending above 1.2395 would lead to the pair moving towards resistance levels at 1.2440 and 1.2470.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

For more information please visit: Forex Time

Disclaimer: The content in this article comprises personal opinions and ideas and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime Ltd, its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice

Article by ForexTime

ForexTime Ltd (FXTM) is an award winning international online forex broker regulated by CySEC 185/12 www.forextime.com