The euro faces a key test this week with plenty of eurozone data and the European Central Bank rate decision to look forward to. The single currency has fallen for two consecutive weeks, but I reckon that run could come to an end. So, keep a close on eye on the EUR/USD and other euro crosses.
Key macro events for the euro this week:
- Tuesday: German ZEW Economic Sentiment
- Wednesday: Eurozone CPI estimate
- Thursday: European Central Bank policy decision
- Friday: Eurozone flash manufacturing and services PMIs
The ECB is unlikely to add to its bond purchases further – certainly not at this meeting anyway after expanding its stimulus program by another 500 billion euros in December as another wave of lockdown measures weighed on economic recovery. Although things have gotten worse, the ECB is likely to wait and see how the virus evolves in the coming months and assess the progress of the vaccines, before deciding whether to do more.
So, I reckon the ECB’s assessment will not be materially different to the December outlook. It may even try and provide a somewhat positive outlook given the rolling out of the vaccines, in an overall still-cautious assessment of the future. If so, the market may interpret this as a sign that the ECB is probably not going to provide further support in the near future. As a result, the euro could find support and resume its bullish trend against the likes of the safe haven US dollar and Japanese yen.
EUR/JPY testing key support
Ahead of the ECB decision, keep a close eye on the EUR/JPY, which has dropped to test a massive area of support around 125.00/125.10 area:
Source: ThinkMarkets and TradingView.com
This area was previously strong resistance, which finally gave way in early December. Now, price is testing this zone from above. Once strong resistance, it may now turn into support. In addition to this level being previous support and resistance, we also have a bullish trend line converging around 125.00 area.
Thus, a potential bounce here towards broken support at 126.00 is likely. But if the ECB is deemed to be more hawkish than expected on Thursday then the EJ could potentially rise to new multi-month highs as the euro shorts rush for the exits.
However, a clean breakdown below 125.00 would probably mark the end of the near-term bullish bias. In that case, the bulls may have to step aside and wait for some bullish price structure to emerge at a later time.
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