The European Central Bank’s monetary policy announcement will be the market’s primary focus tomorrow. The ECB is widely expected to keep policy unchanged but between their quarterly economic forecasts and Mario Draghi’s press conference, we can be assured that there will be wild swings in EUR/USD tomorrow.
Since the last monetary policy meeting in January, inflation picked up significantly with widespread improvements in manufacturing and service sector activity. The German labor market also benefitted from healthier labor market conditions but the ECB said on a few occasions that they would look past temporary increases in inflation. More recent data such as the German IFO report, trade balance and industrial production showed pockets of weakness. This will worry a central bank who is not convinced that the rise in inflation and the general recovery is durable. So while EUR/USD could pop on upgraded economic forecasts, Mario Draghi will most likely talk down the currency and that could erase any earlier gains, making an eventual test of 1.05 feasible.
At the end of the day, the ECB wants the euro to remain weak to support the economy and they will do everything in their power to prevent it from rising including downplaying or flat out dismissing upgraded inflation and GDP forecasts. Support in EUR/USD is at 1.05 and resistance is at 1.0640.
Technically lower highs and lower lows signal further losses in EUR/USD. However, there’s significant support near 1.05. If EUR/USD holds that level, it could drift back up to 1.0650. However, if it breaks it in a meaningful way then the next stop will be 1.04 and possibly even the 14 year low of 1.0340.
