- Amid limited attempts to rebound higher since the start of trading this week, the EUR/USD currency pair may be subject to additional volatility ahead of the European Central Bank's statement later this week.
- Widely, the ECB is expected to keep interest rates unchanged but signal that there is room for easing.
- The current rebound gains for the EUR/USD pair stopped at the 1.0876 resistance level and it is stable around 1.0850 at the time of writing the analysis.
Overall, while inflation estimates remain high based on preliminary consumer price index reports last week, PMI figures point to weaknesses in the manufacturing sector that could weigh on overall growth prospects. At the same time, the US dollar could be driven by key jobs indicators ahead of the release of the nonfarm payrolls (NFP) report on Friday. Recently, the US job growth is expected to slow in February, and a downside surprise could be enough to revive expectations of a rate cut in May and pull the US currency back. On the other hand, upbeat ADP and JOLTS data could support the US dollar throughout the week amid expectations of another potential upside surprise in the nonfarm sector.
Will the euro fall significantly in the coming days?
ING Bank analyzed different scenarios ahead of the European Central Bank (ECB) announcement this week, assessing the potential impact on the EUR/USD exchange rate. According to the bank's analysis, markets are certainly expecting the ECB to try to avoid any market reaction by emphasizing the message that a rate cut is unlikely before June but given the mixed views on this issue within the Governing Council, the possibility of a surprise cannot be ruled out.
ING's base case expectation is a “somewhat dovish” outcome where the ECB says risks to the inflation outlook are balanced and the warning about upside risks to inflation is dropped – in line with previous guidance. In this scenario, the central bank says that the risks to growth are on the downside, acknowledging that the conditions for a rate cut have been discussed.
Meanwhile, the current case sees the EUR/USD pair fall to the key support level of 1.08 (currently at 1.0854). According to ING FX analysts, "The Governing Council also seems to be converging on June as the approximate date for the first cut, and if the ECB actually starts to pave the way for such an outcome, it could be seen as somewhat dovish against the backdrop of more cautious market pricing." They added, "The fact that the ECB is likely to discuss the conditions for starting to ease policy means that the balance of risks is tilted slightly to the downside for the euro this week."
EUR/USD Technical analysis and forecast:
The price of the euro against the US dollar (EUR/USD) is moving cautiously ahead of the European Central Bank's decision later this week. The price is moving within a range with support around the psychological level of 1.0800 and resistance at the 1.0865 area. Currently, the price is retreating from the resistance range. If this continues, the pair may retreat again to the support level or at least to the mid-range around 1.0830. Moving averages barely provide directional clues at the moment, although it appears that the 100 SMA is crossing below the 200 SMA.
At the same time, the Stochastic indicator is also turning downwards after reaching the overbought zone, indicating that sellers are taking control while buyers take a breather. Recently, the oscillation indicator had room to decline before reversing exhaustion among bearish speculators, so the EUR/USD price may continue to follow the same approach. Also, the Relative Strength Index (RSI) seems to be turning downwards after almost reaching the overbought zone, suggesting that sellers are keen to return. Finally, continued downward momentum may stimulate a breakthrough below the support level and a decline with the same height as the chart pattern formation.
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