ECB Preview – Euro steady ahead of rate decision – EURUSD analysis

EURUSD is heading into today’s knife-edge ECB rate decision lacking any real direction after Wednesdays CPI inspired choppy performance. Markets are split on today’s ECB rate decision with money markets pricing around a 65% chance of a 25bps rate hike, but a slight majority of economists polled by Bloomberg expecting a hold. Against this backdrop traders seem to be taking a wait and see approach with EURUSD unchanged, trading in a tight range in Thursdays APAC session and so far in EU session.

This will change at 12:15pm GMT as the ECB announces its rate decision, with a split market there will be almost certain volatility in EURUSD whichever way the ECB goes, with markets pricing in a 65% chance of a hike the risk on balance does seem skewed to the downside for EURUSD. A lot will also depend on the guidance released with the rate decision and the press conference 30 minutes after.

No hike and a statement anything less than ultra hawkish will likely see a sharp drop in EURUSD initially, possibly testing the June and September lows support zone just under 1.07. This will be a key area to watch after the initial reaction.

A Hike of 25bp will likely see an initial pop in EURUSD, but attention will then turn to the statement. The ECB is expected to stick with the data dependent narrative as to its future moves, but it will be hints of possible further hikes (hawkish) or hints that they may be at the peak (dovish) which will likely drive the Euro once the initial reaction is done. Even if we get the 25bp hike today money markets are pricing in 23bp of hikes this year already, this should cap any sustained rise in the Euro after a likely initial spike higher unless the statement hints strongly of more to come, which against a backdrop of a slowing EU economy seems unlikely.

The key level to watch to the upside is the psychological 1.08 level, which would also bring EURUSD up to its trendline resistance and would see hard going for further gains unless at a technical perspective.

The ECB rate decision will be released at 12:15 GMT with the presser at 12:45 GMT.