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EUR/USD Breakout Following ECB Meeting Brings April High on the Radar

EUR/USD Rate Talking Points

EUR/USD trades to a fresh weekly high (1.0973) as the European Central Bank (ECB) sticks to its zero interest rate policy (ZIRP), and the exchange rate may continue to retrace the decline from the April high (1.1039) as it breaks out of a narrow range.

EUR/USD Rate Outlook Hinges on Euro Area 1Q GDP Report & ECB Meeting

EUR/USD extends the advance from the April low (1.0727) even though the ECB unveils a new series of non-targeted pandemic emergency longer-term refinancing operations (PELTROs) as the central bank remains reluctant to push the main refinance rate, the benchmark for borrowing costs, into negative territory.

Image of ECB interest rate decisions

Source: ECB

It seems as though the ECB will rely on its non-standard measures to support the monetary union as the Governing Council also plans to “reduce the interest rate on TLTRO III (Targeted Longer-Term Refinancing Operations) operations during the period from June 2020 to June 2021 to 50 basis points below the average interest rate on the Eurosystem’s main refinancing operations.”

The economic shock from COVID-19 may force the Governing Council to deploy more unconventional tools as the “growth scenarios produced by ECB staff suggest that euro area GDP could fall by between 5% and 12% this year, depending crucially on the duration of the containment measures,” and President Christine Lagarde and Co. may continue to push monetary policy into uncharted territory as the central bank pledges to “adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.”

However, President Lagarde insists that “continued and ambitious efforts are needed, notably through joint and coordinated policy action, to guard against downside risks and to underpin the recovery,” and ECB officials may call upon European lawmakers to provide additional fiscal support as “the Governing Council urges further strong and timely efforts to prepare and support the recovery.”

With that said, the ECB may continue to utilize its unconventional tools as the central bank remains “fully prepared to increase the size of the PEPP (Pandemic Emergency Purchase Programme) and adjust its composition, by as much as necessary and for as long as needed,” and the Euro may face headwinds throughout 2020 as the central bank retains a dovish forward guidance for monetary policy.

Nevertheless, it remains to be seen if the Governing Council will unveil more non-standard measures ahead of the next meeting on June 4 as European Council President Charles Michel plans to make the EUR 540B stimulus package available by June, and EUR/USD may continue to retrace the decline from the April high (1.1039) as it breaks out of a narrow range.

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EUR/USD Rate Daily Chart

Image of EUR/USD rate daily chart

Source: Trading View

  • Keep in mind, the monthly opening range has been a key dynamic for EUR/USD in the fourth quarter of 2019 as the exchange rate carved a major low on October 1, with the high for November occurring during the first full week of the month, while the low for December happened on the first day of the month.
  • The opening range for 2020 showed a similar scenario as EUR/USD marked the high of the month on January 2, with the exchange rate carving the February high during the first trading day of the month.
  • However, the opening range for March was less relevant amid the pickup in volatility, with the pullback from the yearly high (1.1495) producing a break of the February low (1.0778) as the exchange rate slipped to a fresh 2020 low (1.0636).
  • Nevertheless, EUR/USD may trade within a more defined range over the coming days as the decline from the April high (1.1039) failed to produce a test of the yearly low (1.0636), and the rebound from the April low (1.0727) may gather pace as the exchange rate breaks out of a narrow range.
  • Need a break/close above the Fibonacci overlap around 1.0950 (100% expansion) to 1.0980 (78.6% retracement) to bring the 1.1040 (61.8% expansion) region on the radar, which largely lines up with the April high (1.1039), with the next area of interest coming in around 1.1100 (78.6% expansion) to 1.1140 (78.6% expansion).

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— Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong