A growing sense of anticipation and excitement was felt across financial markets on Thursday ahead of the European Central Bank’s first policy meeting of the year.
Although markets widely expect the ECB to leave monetary policy unchanged in January, much of the action and volatility may be created during Mario Draghi’s press conference in the afternoon. While economic growth in Europe continues to follow a positive trajectory, stubbornly low levels of inflation still remain a headache for policymakers. With an aggressively appreciating euro complicating the ECB’s efforts to hit the 2% inflation target by making exports less attractive and imports cheaper, doves could easily make an unwelcome appearance.
It is interesting how the bullish sentiment towards the European economy and growing expectations of QE ending before year-end, have elevated the Euro to levels not seen in more than three years. This same appreciation in the Euro has the potential to weigh heavily on inflation, consequently placing the central bank in a tricky position.
Any signs of Mario Draghi adopting a dovish stance and verbally intervening could expose the Euro to downside risks. Market expectations are heated over the central bank ending QE before year end and today could be a good opportunity for Draghi to cool these speculations.
Taking a look at the technical picture, the combination of euro strength and dollar weakness has made the euro/U.S. dollar (EUR/USD) currency pair heavily bullish on the daily and weekly charts. There have been consistently higher highs and higher lows, while prices are trading comfortably above the 50 Simple Moving Average. A breakout and daily close above 1.2440 could encourage a further incline towards 1.2500 and 1.2560, respectively. Alternatively, a failure for prices to secure a daily close above 1.2440 could invite a decline back towards 1.2300.
Dollar Index dips below 89.00
The Greenback extended losses against a basket of major currencies on Thursday morning after stumbling overnight on comments from US Treasury Secretary Mnuchin.
With Mnuchin stating a weaker Dollar is “good” for American trade, Dollar bearish investors ruthlessly attacked the currency pushing the Dollar Index below 89.00 during early trade. Sentiment towards the dollar is turning increasingly bearish and this is reflected in the depressed price action. From a technical standpoint, the Dollar Index remains heavily bearish on the daily charts. A breakdown and daily close below 89.00 could open a clean path towards 88.00.
Commodity spotlight – Gold
Gold has jumped to levels not seen since August 2016, to above $1360 per ounce thanks to a heavily depressed U.S. dollar.
The yellow metal remains firmly bullish on the daily charts with further upside on the cards amid a vulnerable U.S. dollar. A decisive breakout and daily close above $1360 could encourage a further incline higher towards $1375. Bulls remain supported above the $1340 dynamic support level.