ECB on Deck

All eyes are firmly on the ECB today as the central bank prepares to make its September rates decision. Expectations have been rather split ahead of this event. On the one hand, stickiness in inflation at elevated levels suggests that the bank will press ahead with further tightening, as per its mandate of achieving price stability. However, with recent eurozone data highlighting weakness in the economy, some players anticipate that the bank will hold off on further tightening to prevent greater harm to the economy.

Scenarios & Market Reaction

Still, even if the ECB does hike today, the upside reaction will likely be limited for EUR with traders sensing that a further hike at this point would likely be the last or nearly the last. Today’s meeting is likely to show much greater dissent between hawks and doves and, as such, EUR looks vulnerable to fresh downside on the back of the meeting. Obviously if the bank refrains from hiking at this point, the sell-off will be stronger. In terms of bullish scenarios, the bank would need to hike while striking a unified front in signalling further tightening will likely be needed. Anything except this scenario is likely to result in EUR weakening near-term even if we get a knee jerk pop higher today.

Technical Views

EURUSD

The sell off has seen the market breaking down below the rising trend line from YTD lows. Price has now broken below the 1.0785 level also and, while below here, the focus is on a further push lower in line with bearish momentum studies readings. The next support to watch will be the 1.0515 level.