EUR/USD Rate Talking Points
EUR/USD extends the correction from the first week of December even though the European Central Bank (ECB) expands its balance sheet by EUR 20B/month, and the yearly opening range in focus as the exchange rate carves a series of higher highs and lows.
EUR/USD Rate Forecast: 2020 Opening Range in Focus
EUR/USD sits a few pips away from the August high (1.1250) as the ECB conducts a strategic review for the first time since 2003, and it seems as though the Governing Council is in no rush to further insulate the monetary union as the central bank insists that “the implementation of structural policies in euro area countries needs to be substantially stepped up to boost euro area productivity and growth potential.”
The comments suggest the ECB will call on European lawmakers to support the economy as the central bank argues that “governments with fiscal space should be ready to act in an effective and timely manner.” In turn, the ECB may merely attempt to buy time at the next meeting on January 23 as “the comprehensive package of policy measures that the Governing Council decided in September provides substantial monetary stimulus.”
Nevertheless, the ECB’s language is likely to evolve over the coming months as President Christine Lagarde asserts that “each and every President has his or her own style of communicating,” and it remains to be seen if the Governing Council will alter the forward guidance in 2020 as the downside risks surrounding the growth outlook “have become somewhat less pronounced.”
However, the ongoing shift in US trade policy may become a growing concern for the ECB as the Office of the United States Trade Representative (USTR)initiates “a process to assess increasing the tariff rates and subjecting additional EU products to the tariffs.”
As a result, the ECB could be forced to revisit its rate easing cycle as “the Governing Council continues to stand ready to adjust all of its instruments, as appropriate, to ensure that inflation moves towards its aim in a sustained manner.”
With that said, the Euro may face headwinds in 2020 as the ECB relies on its non-standard measures to achieve its one and only mandate for price stability, but recent price action raises the scope for a larger correction in EUR/USD as the exchange rate carves a series of higher highs and lows.
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EUR/USD Rate Daily Chart
Source: Trading View
- The broader outlook for EUR/USD remains tilted to the downside as the exchange rate clears the May-low (1.1107) following the Federal Reserve rate cut in July, with Euro Dollar trading to a fresh yearly-low (1.0879) in October.
- 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 monthly 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.
- As a result, the yearly opening range is in focus for EUR/USD, but the correction from the 2019 low (1.0879) may continue to unfold as the exchange rate carves a series of higher highs and lows.
- The break/close above the Fibonacci overlap around 1.1190 (38.2% retracement) to 1.1220 (78.6% retracement) brings the 1.1270 (50% expansion) to 1.1290 (61.8% expansion) region on the radar, with the next area of interest coming in around 1.1340 (38.2% expansion).
- Will keep a close eye on the Relative Strength Index (RSI) as it approaches overbought territory, with a move above 70 raising the scope for a larger correction in EUR/USD as the bullish momentum gathers pace.
For more in-depth analysis, check out the 1Q 2020 Forecast for Euro
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— Written by David Song, Currency Strategist
Follow me on Twitter at @DavidJSong.