Date: 22 Jan 2019

The European Central Bank meeting this week is not expected to provide any major changes in monetary policy from the governing council, although financial markets are bracing themselves for a more dovish speech from ECB President Mario Draghi as inflation expectations slump and EU economic indicators continue to decline.

The last set of inflation data figures from the euro area confirmed that inflation remains well below the European Central Bank mandated target of 2%, with the final December eurozone CPI reading showing inflation hitting just +1.6% on a year-on-year basis. It is difficult to imagine how the ECB could justify a rate hike any time soon, while inflation continues to miss its long-term goals in a weakening economic environment.

Official data last week showed CPI inflation inside the powerhouse German economy rising just 0.1% in December, while year-on-year CPI grew a disappointing 1.7% inside the world’s fourth-largest economy. To make matters worse for ECB, the German economy also posted its worse economic growth figures in five years last week as manufacturing orders and industrial production plummet.

In keeping with the souring mood towards the overall eurozone and German economy, we also get a snapshot of preliminary January PMI manufacturing activity for France and German just before the ECB meeting on Thursday. French manufacturing activity is expected to remain in contraction, while the German economy is expected to post a 51.3 reading, which is worse than the dire 51.5 headline reading posted in December.

Mario Draghi’s tone towards the EU economy during Thursday’s ECB policy meeting will likely be closely watched by market participants. During his speech before the EU parliament last week, it was apparent the outgoing ECB President is well aware that EU growth is decelerating, although Mr. Draghi has so far stopped short of suggesting the economic slowdown in the euro area is likely to turn into a full-blown recession this year.

Brexit no-deal aftershock’s and the trade war between the United States and China are likely to feature heavily into the conversation at Thursday’s press conference in Frankfurt, following the ECB’s monetary policy statement. The reaction of the single currency is likely to be a gauge of just how bearish market participants believe Draghi is turning on the overall EU economy and its growth prospects for the rest of 2019.

 

EURUSD Daily Candlestick Chart. Source: ActivTrader Platform

EURUSD Daily Candlestick Chart. Source: ActivTrader Platform

 

The 1.1300 level is a major technical level to watch this week, a sustained loss of this key area is likely to provoke an eventual test towards the 2018 trading low, at 1.1215. If the former yearly trading low is breached, the 1.1170 and 1.1080 levels offer the strongest forms of support before the psychological 1.1000 barrier.

If we see the EUR/USD pair heading higher this week, key technical resistance is found at the 1.1460 and 1.1550 levels. The 1.1410 resistance level is the immediate upside hurdle that EUR/USD bulls need to negate in the short-term.

 

Written by Nathan Batchelor, External Analyst

 

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