The European Central Bank monetary policy statement is right around the corner, which means a nice round of volatility for the euro may be up ahead.
Will this lead to a opportunity to catch the recent downtrend in EUR/NZD at better prices?
EUR/NZD Downtrend Bounce?
The big event of the week for euro traders is right around the corner with the latest monetary policy statement from the European Central Bank. Expectations are that the ECB will make no policy changes to interest rates or bond purchases, and if that’s the case, then traders will focus on comments regarding futures plans for quantitative easing after the Pandemic Emergency Purchase Programme (PEPP) ends in 2022. Growth and inflation forecasts will also be items to watch for tapering hints as well.
With recent data from Europe pointing to a strong recovery in the second quarter and rising inflation conditions, there are calls from within the ECB to reduce stimulus as soon as possible. But recent sentiment data shows that conditions may start to slow (e.g., Eurozone manufacturing growth slows to six-month low in August) due to the pandemic, which lowers the odds of fully bullish rhetoric from the ECB tomorrow.
We think that the ECB is likely to sound more optimistic than not, especially with the high rate of vaccination raising the odds of a continued recovery in Europe. This could lead to a rally in the euro this week, and if so, a potential opportunity to play the downtrend in EUR/NZD at better prices.
On the four hour chart above, we can see that EUR/NZD bears have been in solid control since the end of August, likely benefitting from New Zealand’s ability to control the covid-19 outbreak. Longer term, New Zealand is likely to keep the pandemic under control and continue its recovery, raising the odds that the RBNZ could raise interest rates before its counterparts, including the ECB.
That should keep pressure on EUR/NZD, but tomorrow’s event may lead to short-term volatility, and if that volatility takes EUR/NZD higher to the Fibonacci retracement area and the previous consolidation area around 1.6750 – 1.6800, then we’ll be watching that area for potential reversal patterns to play the downtrend.
Of course, if the ECB surprises the markets with a confirmed plan to taper bond buying purchases and/or a plan to raise interest rates, the euro is likely to rally and rally hard. In that scenario, a break above 1.6800 is the price action pattern that may draw in fresh EUR/NZD bulls and/or force the bears to cover their shorts, potentially taking EUR/NZD up to the 1.6900 – 1.7000 by sometime next week.
What do you all think? Will the ECB event raise volatility in the euro, or will it be a snoozer event? Let me know in the comments section below!
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