EUR / USD – The fate of the euro hangs by a thread and its future is at the mercy of Draghi

KEY POINTS EUR / USD:

• In the new week, the attention of investors will focus on the monetary policy announcement of the European Central Bank.
• The ECB, under the direction of Mario Draghi, is expected to launch a new stimulus package to boost growth and inflation in the Eurozone.
• The course adopted by the central bank could generate episodes of high volatility and cause strong movements in the EUR / USD.

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The euro closed the trading session on Friday with a slightly negative tone at 1.1027, but managed to add a weekly advance of 0.35% against the US dollar. Thus, the EUR / USD exchange rate moved away from its 28-month low of 1.0926 set on Tuesday, September 3.

While there have been no strong volatility catalysts in recent days, the situation could change dramatically in the new week with the announcement of the monetary policy of the European Central Bank – the penultimate meeting chaired by Mario Draghi.

In order to deal with these risks, it is possible for the ECB to cut its deposit facility rate by 10 basis points to -0.500% and to introduce a compensatory system of staggered rates pTo mitigate the effects of negative rates in theThe financial institutions. There is also a high probability that the central bank will adopt a more accommodative orientation bias and that it will deploy a new bond purchase program, possibly of 40 billion euros. monthly for a horizon of 12 months.

As these measures have been discounted by a large segment of the market, their launch would not have a devastating downward effect on the euro, although they could cause moderate losses due to the adjustment of investors' positioning. Under this scenario, the EUR / USD could go to the 2019 low zone near 1.0900.

On the other hand, if the European Central Bank does not meet expectations and delays the deployment of a new “quantitative easing” program, a strong advance in the EUR / USD that would take it towards 1.1200 is not ruled out. In any case, Draghi would try to avoid this event at all costs, since a sudden appreciation of the common currency would delay the convergence of inflation towards the 2% target, further hampering the central bank's mandate.

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EUR / USD TECHNICAL ANALYSIS

The technical support and resistance levels are usually respected when the movements of the price action are moderate and not abrupt. In the new week, however, volatility could be extreme as we approach the ECB's monetary policy announcement, so it is important to remain cautious and monitor the development of market sentiment. With this in mind, below, we present the most relevant levels for the EUR / USD in the short term.

The first resistance under consideration is located at 1.1150 and this corresponds to the upper directive of a short-term descending channel. A break of this level would put into play the 1.1220.

On the downside, the first relevant support is in the region of 1.0920 / 1.0900. A violation of this floor would expose the 1.0825.

EUR / USD TECHNICAL GRAPH

TRAINING TOOLS FOR TRADERS

— Written by Diego Colman, Market Analyst for DailyFX in Spanish.

Follow me on twitter: @DColmanFX