Currency Forecast EUR/USD; Draghi’s Dire Predictions

Draghi’s Warnings Tank Euro

Outgoing ECB Chief Mario Draghi did not produce additional stimulus at his final meeting but he did leave the bank and the EU with a warning. Ongoing weakness in global economies associated with but not limited to impacts from the U.S./China trade war threaten EU stability. If further actions are not take it is possible the EU could see prolonged and protracted weakening, especially in the pillar-economy of Germany. Germany is already on the brink of recession, a tip in the wrong direction could have far-reaching repercussions for the EU and the world.

Mario Draghi

The incoming data since the last governing council meeting in early September confirm our previous assessment of a protracted weakness in the euro area growth dynamics, the persistence of prominent downside risk and muted inflation pressure”

Dire indeed.

The EUR/USD had been trading higher before the comments. The ECB’s lack of policy change coupled with a high-probability FOMC rate cut next week was driving the move. The comments undermined any hope of bullishness for euro traders because it virtually assures Christine Lagarde will follow-through on Draghi’s plans. The pair is now in retreat and likely heading to the 1.1050 level and the short-term moving average. The moving average will likely provide support until next Wednesday afternoon at which time the FOMC will take control of the market.

The longer-term outlook for the pair is range bound. The FOMC is largely expected to cut rates at the next meeting but the outlook for future cuts is still cloudy. No member of the committee is in favor of aggressive cutting and most think the “mid-cycle adjustment” is over. The risk for traders today is whether or not the FOMC’s outlook has changed. It is possible the committee could preemptively cut by 50 bps instead of the expected 25, they may instead indicate future cuts are needed, they may even decide that “wait and see” is still the way to go. It’s all up in the air.

The extreme-peak formed on the daily chart suggests the recent high will be tested again. The caveat is that support at the low end of the newly established range could easily be tested again before that happens. The indicators are consistent with a peak, we’ll have to wait on the FOMC to see if there is another bullish wave waiting to crash or if the bears will take over the market. A move below the EMA with a close AFTER the FOMC meeting will be bearish. Until then I’d use the EMA as a take-profit target for bearish trades and possible entry point for bullish.