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EUR/USD Vulnerable to Further Losses on ECB QE Adjustment

- European Central Bank (ECB) to Retain Zero-Interest Rate Policy (ZIRP).

- Will the Governing Council Adjust the Non-Standard Measures?

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Trading the News: European Central Bank (ECB) Interest Rate Decision

Even though the European Central Bank (ECB) is widely anticipated to preserve the zero-interest rate policy (ZIRP) in July, a series of adjustments to the non-standard measures may drag on the Euro and spark a near-term decline in EUR/USD should the central bank continue to push monetary policy into unchartered territory.

What’s Expected:

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Why Is This Event Important:With the U.K.’s imminent exit from the European Union (EU) clouding the economic outlook for the monetary union, ECB President Mario Draghi may take additional steps to insulate the euro-area, and the Governing Council may extend the duration as well as the scope of its quantitative easing (QE) program in an effort to encourage a stronger recovery.

Expectations: Bearish Argument/Scenario

The weakening outlook for global growth accompanied by the spillover effects from ‘Brexit’ may prompt the ECB to boosts its efficacy of its non-standard measures, and a meaningful adjust to the Public Sector Purchase Program (PSPP) may dampen the appeal of the single-currency as the central bank continues to embark on its easing cycle.

Risk: Bullish Argument/Scenario

Nevertheless, sticky price growth paired with the pickup in private consumption may push the ECB to buy more time, and more of the same from President Draghi may generate a relief rebound in EUR/USD as market participants scale back bets for additional monetary support.

How To Trade This Event Risk(Video)

Bearish EUR Trade: ECB Adjusts Non-Standard Measures

  • Need red, five-minute candle following the policy statement to consider a short EUR/USD trade.
  • If market reaction favors a bearish Euro trade, sell EUR/USD with two separate position.
  • Set stop at the near-by swing high/reasonable distance from cost; need at least 1:1 risk-to-reward.
  • Move stop to entry on remaining position once initial target is met, set reasonable limit.

Bullish EUR Trade: Governing Council Preserves Current Policy

  • Need green, five-minute candle to favor a long EUR/USD trade.
  • Implement same strategy as the bearish euro trade, just in the opposite direction.

Potential Price Targets For The Release

EURUSD Daily

EUR/USD Vulnerable to Further Losses on ECB QE Adjustment

Chart – Created Using FXCM Marketscope 2.0

  • EUR/USD may continue to give back the advance from earlier this year as a head-and-shoulders formation appears to be playing out in the second-half of 2016, with a closing price below the Fibonacci overlap around 1.0960 (23.6% retracement) to 1.0970 (38.2% retracement) opening up the next downside target around 1.0910 (38.2% expansion).
  • Key Resistance: 1.1760 (61.8% retracement) to 1.1810 (38.2% retracement)
  • Key Support: Interim Support: 1.0380 (78.6% expansion) to 1.0410 (61.8% expansion)

Check out the short-term technical levels that matter for EUR/USD heading into the rate decision!

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the Traits of Successful Traders series.

Impact that the ECB rate decision has had on EUR/USD during the last meeting

June 2016 European Central Bank Interest Rate Decision

EUR/USD 5-Minute

EUR/USD Vulnerable to Further Losses on ECB QE Adjustment

The European Central Bank (ECB) largely endorsed a wait-and-see approach in June as the Governing Council retained the zero-interest rate policy (ZIRP) and raised its growth & inflation forecast for 2016, but President Mario Draghi reiterated interest rates may ‘remain at present or lower levels for an extended period of time’ amid the downside risks surrounding the economy. Moreover, the ECB argued borrowing-costs will stay low even after the central bank completes its quantitative easing (QE) program as the Governing Council struggles to achieve its one and only mandate for price-stability. The market reaction to the fresh batch of ECB rhetoric was short-lived, with EUR/USD slipping back below the 1.1200 handle to end the day at 1.1149.

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EUR/GBP Breakdown Eyes Critical Support at 7520

GBP/USD Successful Re-Test of Former Resistance Line

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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Euro, Yen May Fall as Pound Gains on Confidence-Boosting ECB Tone

Talking Points:

  • ECB rate decision unlikely to bring immediate policy stance change
  • Markets to focus on post-Brexit countermeasures, Italian bank risk
  • Euro, Yen to fall as Pound gains on confidence-boosting ECB tone

All eyes are on the ECB monetary policy announcement. Euro-area financial conditions have recovered from tightening in the run-up to the UK Brexit referendum, so further action seems unlikely at this stage. The post-meeting press conference with ECB President Mario Draghi may prove to be a major market mover however.

Investors will look to be reassured on two fronts. First, they will want the ECB to firmly establish that it has the tools to fight back if knock-on negativity following the Brexit vote intensifies, as well as a willingness to use them. Second, they will want an assurance that the Bank is prepared to support tottering Italian banks.

An undesirable side-effect of lowering borrowing costs further is that it hurts Eurozone banks’ earnings at a time when an abundance of bad debt has left Italian lenders particularly vulnerable. Indeed, shares in the country’s top financial institutions plunged after the Brexit vote, revealing traders’ concern about their viability in the event that the ECB is forced to ease further.

For its part, the central bank may be non-committal until it publishes bank stress tests for the region on July 29. In the meantime, markets will want to hear that it is prepared to back a somewhat augmented “bail-in” process that spares retail investors that own Italian bank paper from suffering large losses as part of a “precautionary” capital injection (i.e. one that doesn’t trigger bankruptcy per Eurozone rules).

If both of these conditions materialize, swelling risk appetite is likely to weigh on the Japanese Yen. It may likewise temporarily boost the typically sentiment-geared Australian and New Zealand Dollars, although follow-through seems unlikely. Both currencies have notably diverged from binary risk on/off dynamics recently amid swelling RBA and RBNZ rate cut speculation.

Interestingly, the British Pound may find broad-based strength in this scenario. A post-Brexit slowdown in the UK threatens to export weakness across the English Channel. The very same channels of transmission may echo support from an expanded ECB monetary policy cushion in the opposite direction. Needless to say however, the Euro may suffer.

The Kiwi Dollar underperformed in overnight trade after the RBNZ released a dour inter-meeting assessment of economic conditions, boosting bets on a rate cut to be announcement next month. The Yen likewise faced selling pressure as Asian shares advanced, undermining demand for the perennially anti-risk Japanese unit.

Are FXCM traders long or short EUR/USD before the ECB rate decision? Find out here!

Asia Session

European Session

Critical Levels

— Written by Ilya Spivak, Currency Strategist for DailyFX.com

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Contact and follow Ilya on Twitter: @IlyaSpivak

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China’s Market News: Yuan Stages Biggest Rally in Two Weeks

This daily digest focuses on market sentiment, new developments in China’s foreign exchange policy, changes in financial market regulations and Chinese-language economic coverage in order to keep DailyFX readers up-to-date on news typically covered only in Chinese-language sources.

- The Yuan advanced the most in two weeks against the US Dollar following the PBOC’s guidance.

- China’s Central Bank added short-term liquidity this week in the effort of meeting temporary demand.

- China’s tax income in the first six months increased +9.4%, providing support to the proactive fiscal policy.

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Hexun News: Chinese leading online media of financial news.

- The onshore Yuan extended its rally against the US Dollar for the second consecutive day after the PBOC fixed the Yuan rate 25 pips or 0.03% stronger from the Tuesday fix. As of 10am EDT, the onshore Yuan (USD/CNY) has increased +0.3% to 6.6728. The offshore Yuan (USD/CNH) strengthened as well, rising +0.41% on Wednesday, which is the largest rally in two weeks. China’s financial institutions suspect that the PBOC may intend to hold Yuan rates near or below the key level of 6.70 ahead of the G20 ministers meeting in Chengdu this weekend.

From July 23rd to 24th, finance ministers and central bank governors from G20 countries will meet in Chengdu, a major Chinese city in the southwest region. This will be the first meeting of these top officials after the Brexit decision. It is expected that they will discuss topics such as how to promote the global economy and maintain financial stability in the post-Brexit world.

Sina News: China’s most important online media source, similar to CNN in the US. They also own a Chinese version of Twitter, called Weibo, with around 200 million active users monthly.

- China’s Central Bank started to add liquidity to the market this week, following two weeks of withdrawals. The Shanghai overnight Yuan borrowing rate saw increases from Monday, indicating slightly tightened liquidity in the short term. Thus, the PBOC injected a net of 30 billion Yuan on Tuesday and 45 billion Yuan on Wednesday. The increasing demand in cash is mainly resulting from corporate tax payments in July. In terms of the medium-term liquidity, 1W, 2W, 1M, 3M SHIBOR are all in downward trends, indicating sufficient supply.

- China’s tax income in the first six months of 2016 increased +9.4% to 6.4979 trillion Yuan, according to the State Administration of Taxation. After deducting the carryover effect, the real growth in tax income was +5.1%. The increase in tax income is critical for China right now as it contributes a major portion of China’s fiscal income. As the efficiency of monetary policy is on the decline, the Chinese government is introducing proactive fiscal policy to support the slowing economy. Sufficient tax income assures this kind of policy to remain sustainable. Also, the breakdown of tax income shows that the tertiary sector continues to expand as expected: Taxes collected from the third industry increased +10.9% from last year and took up 58.2% of all the taxes.

China Finance Information: a finance online media administrated by Xinhua Agency.

- The National Development and Reform Commission (NDRC) announced a national railway plan on July 20th. By 2020, China will establish a railway network of 150,000 km (93,205.7 miles). In 2015, the Chinese government launched a five-year plan, which is to double its 2010 GDP and per-capita income of Chinese household by 2020. In order to reach the target, China needs to maintain an annual growth of 6.5% over the following years. National infrastructure projects such as railway constructions will help to boost the economic growth. Also, they provide job opportunities for construction workers who are facing job relocation challenges due to the national-wide production cuts.

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EUR/USD Battle Lines Drawn Ahead of ECB- Levels To Know

Talking Points

EURUSD 60min

EUR/USD Battle Lines Drawn Ahead of ECB- Levels To Know

Chart Created Using TradingView

Technical Outlook: EURUSD has been trading within the confines off a well-defined descending median-line formation extending off the yearly highs, with an embedded pitchfork off last week’s high keeping the near-term focus lower. With that said, the pair is now approaching confluence Fibonacci support at 1.0975/80.

Heading into tomorrow’s European Central Bank (ECB) interest rate decision, look for near-term resistance at the weekly open / 61.8% ext at 1.1050/51 and theupper parallel. A breach through the monthly open at 1.1106 would be needed to shift the broader focus back to the long-side of the euro.

A break below near-term support targets the median-line backed by the 88.6% retracement at 1.0941 & the 100% extension at 1.0909. From a trading standpoint, I would be looking to fade weakness into this region on an ECB sell-off. Continue tracking this setup and more throughout the week- Subscribe to SB Trade Deskand take advantage of the DailyFX New Subscriber Discount.

Avoid the pitfalls of near-term trading strategies by steering clear of classic mistakes. Review these principles in the “Traits of SuccessfulTraders” series.

EUR/USD Battle Lines Drawn Ahead of ECB- Levels To Know

  • A summary of the DailyFX Speculative Sentiment Index (SSI)shows traders are net long GBPJPY- the ratio stands at +1.16(54% of traders are long)-weak bearishreading
  • Yesterday the ratio was +1.15. Long positions are 1.8% higher than yesterday and 35.7% above levels seen last week.
  • Open interest is 1.3% higher than yesterday and 10.9% above its monthly average.
  • A flip to net-long keeps the focus lower with an increase in long-exposure coming alongside a build in open interest suggesting that the immediate risk remains for additional losses heading into tomorrow’s ECB rate decision.

Help fine-tune you entries, click here to learn more about the DailyFX Grid Sight Index (GSI)

Relevant Data Releases This Week

EUR/USD Battle Lines Drawn Ahead of ECB- Levels To Know

Other Setups in Play:

Looking for more trade ideas? Review DailyFX’s Top Trading Opportunity of 2016

—Written by Michael Boutros, Currency Strategist with DailyFX

Follow Michaelon Twitter @MBForex contact him at mboutros@dailyfx.com or Click Here to be added to his email distribution list

Join Michael for Live Scalping Webinars on Mondays on DailyFX and Tuesday, Wednesday & Thursday’s on SB Trade Desk at 12:30 GMT (8:30ET)

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NZD/USD Continues to Search for Support Ahead of RBNZ Update

Talking Points:

- NZD/USD Continues to Carve Lower-Highs Ahead of RBNZ Update.

- USDOLLAR Extends Advance; Existing Home Sales on Tap.

Avoid the pitfalls of trading by steering clear of classic mistakes. Review these principles in the Traits of Successful Traders series.

NZD/USD

NZD/USD Daily Chart

Chart – Created Using FXCM Marketscope 2.0

  • Following the failed attempts to test the Fibonacci overlap around 0.7330 (38.2% retracement) to 0.7340 (61.8% expansion), NZD/USD stands at risk for a larger pullback amid the recent string of lower-highs in the exchange rate, while the Relative Strength Index (RSI) continues to carve a bearish formation.
  • With the Reserve Bank of New Zealand (RBNZ) scheduled to release its updated forecasts ahead of the next interest-rate decision on August 11, the weaker-than-expected 2Q Consumer Price Index (CPI) print may encourage the central bank to adopt a more cautious tone for the economy as the outlook for global growth becomes increasingly clouded with uncertainty.
  • Next downside region of interest comes in around 0.6950 (38.2% retracement) to 0.6980 (38.2% expansion) followed by former resistance around 0.6890 (50% expansion) to 0.6900 (100% expansion).

DailyFX SSI

  • The DailyFX Speculative Sentiment Index (SSI) shows the retail crowd has flipped back net-short NZD/USD on July 19, with the ratio hitting a near-term extreme earlier this month as it slid to -2.25.
  • The ratio currently sits at -1.21 as 45% of traders are long, with long positions 30.2% higher from the previous week, while open interest stands 6.5% above the monthly average.

Why and how do we use the SSI in trading? View our video and download the free indicator here

USDOLLAR(Ticker: USDollar):

NZD/USD Continues to Search for Support Ahead of RBNZ UpdateUSDOLLAR Daily Chart

Chart – Created Using FXCM Marketscope 2.0

  • The near-term breakout in the USDOLLAR may gather pace over the coming days as the greenback starts to carve a series of higher highs & lows; will keep a close eye on the Relative Strength Index (RSI) as it approaches overbought territory.
  • May see second-tier data coming out of the U.S. economy curb the near-term advance in the greenback as Existing Home Sales are projected to contract 0.9% in June, but may see growing demand for USD-denominated assets especially as the International Monetary Fund (IMF) lowers its outlook for global growth.
  • Following the close above 12,049 (78.6% retracement) to 12,064 (61.8% retracement), will retain a constructive outlook for USDOLLAR, with the next topside target coming in around 12,170 (78.6% retracement) to 12,176 (78.6% expansion).

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Trading NZD/USD? Watch this Level in Lumber

— Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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Australian Dollar at Risk on Post-Brexit, Geopolitical Jitters

Australian Dollar at Risk on Post-Brexit, Geopolitical Jitters

Fundamental Forecast for the Australian Dollar: Neutral

  • Australian Dollar likely to fall in with risk sentiment trends yet again
  • Eurozone data, ECB rate decision to offer early Brexit spilloverclues
  • Geopolitics complicate the landscape as coup breaks out in Turkey

Are FXCM traders buying or selling AUD/USD? Find out here.

A lull in top-tier domestic event risk puts the Australian Dollar at the mercy of risk sentiment trends once again. The currency remains highly sensitive to changes in market mood, with the correlation between AUD/USD and the benchmark S&P 500 stock index at a three-month high of 0.9 (on rolling 20-day studies).

The aftermath of the UK Brexit referendum remains a critical macro theme. With the threat of a financial crisis immediately following the vote seemingly out of the way, investors have turned their attention to gauging the severity of knock-on effects on global economic growth and financial stability.

Needless to say, the Eurozone is ground zero for spillover. Germany’s ZEW survey of investor confidence, the flash Eurozone PMI roundup from Markit Economics and the ECB monetary policy announcement will offer early clues about the severity of contagion being expected in official and private-sector circles.

Uncertainty about the ground rules of the future economic relationship with the UK – heretofore the second-largest EU member state – will almost certainly dampen activity on the Continent. PMI and ZEW data will hint at the severity of the cooling effect while the ECB will suggest what may be done about it.

Eurozone economic news-flow has somewhat softened relative to consensus forecasts recently, warning that signs of weakness may already be emerging (although it is premature to say this with confidence for now). If this paves the way for downside surprises, risk appetite may be undermined.

For its part, the ECB seems unlikely to deliver an outright expansion of stimulus measures but comments from central bank President Mario Draghi will be critical to gauge policymakers’ readiness to act if need be. A neutral wait-and-see posture may prove to be a disappointment, amplifying the threat of risk aversion.

On the geopolitical front, an attempted military coup in Turkey late Friday complicates the landscape further. The country’s proximity to and significant economic linkages with Western Europe may fuel fears that turmoil there will amplify existing post-Brexit vulnerabilities, catalyzing a broader unraveling.

Taken together, all this amounts to a precarious environment for the Aussie. Much of the landscape remains clouded however and a great deal can change quickly, triggering seesaw volatility. With that in mind, the probability of follow-through on seemingly decisive moves should not be taken for granted.