EUR/USD: the euro drops sharply, testing key support at 1.10 ahead of ECB meeting; a strong rebound coming today after Draghi's speech?

The EUR/USD pair fell sharply yesterday, and is currently testing key support at 1.10.

Technical analysis of the pair

In addition to this important test, several major bearish signals were identified. The EUR/USD has indeed fallen below its 100 and 200-hour moving averages.

With a little hindsight, we can also see that the EUR/USD rallies have been blocked several times in recent days by a downward trend line visible since 12 August (see chart at the far bottom).

The decline observed yesterday is therefore part of a realignment with the underlying downward trend. The fall could thus continue until the recent annual low of 1.0925 (hit at the beginning of September).

As for the reasons for yesterday's decline, no particular news seems to be the root cause.

Traders are already focused on today's ECB meeting, an event that could prove decisive for the EUR/USD pair, and yesterday's drop could be linked to the market's dovish expectations.

Yesterday's price action therefore suggests that we could see a recovery of the euro today, in the event that the ECB delivers a result that does not exceed market expectations. However, any immediate reaction to the decision will depend mainly on the extent of the rate reduction (10 or 20 basis points) and the potential announcement of impending quantitative easing.

Several banks have shown a similar position this week.

Mizuho, ANK and Goldman Sachs anticipate a rise in the Euro against the ECB tomorrow

Mizuho said it does not expect the ECB to relaunch quantitative easing, and is displaying a bullish view of the euro, anticipating a rise of the EUR/USD pair to 1.15 by the end of 2019.

ANZ bank says that "the market expects a rate cut coupled with a recovery in asset purchases", and warned that ECB decisions that turn out to be lower than these expectations will have a bullish impact on the pair, pointing out that "recent divisions within the ECB suggest that this is a very real possibility".

Lastly, Goldman Sachs expects a 0.2% drop in the deposit rate and quantitative easing, but doubts of a potential downward impact on the euro.

According to Goldman Sachs, this package, which constitutes its most likely scenario, "could easily disappoint by its size or timing". Thus, the bank warns that it is no longer "confident that the realisation of its expectations will have a significant downward impact on the pair in the short term".

Conclusion

In the end, it seems that the odds are therefore to the upside for the pair today in terms of the ECB meeting, for several reasons.

Market expectations are high, but the ECB has little room to manoeuvre, with a monetary policy that has already been ultra-flexible for many years.

But in addition to not being really "materially" able to exceed market expectations, the ECB might prefer to keep its ammunition in case the economy makes a more severe turn for the worse.

Moreover, several ECB members have already spoken out against monetary easing, which also limits Mr. Draghi's ability to ease monetary policy.

Lastly, yesterday's decline offers a comfortable margin for the pair to progress, which should not be slow to recover if the ECB does disappoint market expectations tomorrow.

4-hour EUR/USD chart