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Andreas Zanin
Analysis | October 28, 2020

EUR Outlook and Focus – ECB Meeting Preview

Fundamentals, Sentiment & Technicals

28/10

In terms of EUR/USD the price action has been boring in recent months with the pair trading in low volatility in a tight range so are we going to get an increase in volatility in the pair? “It is hard for us to get too excited for a meaningful break higher in EUR/USD near-term. We are expecting the pair to remain generally rangebound for now.” (TDS)

We are expecting a big move in EUR/USD – We have the ECB on Thursday 29/10 and we expect the ECB to cap any euro upside and as we move to the US elections next week we expect a major break to the downside.

ECB To Limit EUR Upside and the Catylist for a Downside Break

We have the ECB meeting Thursday and they are not expected to change the current policy. which could raise further market expectations for a December decision to increase or extend PEPP stimulus. The ECB also faces a major problem which is there is a high chance of deflation in the zone. The ECB is aware that a stronger euro will increase deflationary pressure and they are already thinking of targeting the exchange rate.

The ECB recently released a working paper on euro strength and noted the first line of defense to prevent Euro appreciation is more QE. For now, we expect the ECB to take a wait and see approach in terms of action but be very dovish in terms of the statement.

The ECB will put a lid on euro strength but the risks are all to the downside in the pair in our view due to speculative positioning. Speculators are holding a 2 year high in terms of long positions on this week’s COT Net Traders Report. With speculators heavily long what could cause them to exit the market? We have a major event coming up on November 3rd…

US Elections and a Move to Risk Off

As we have noted in another post the market is discounting a big win for the Democrats and Joe Biden but we see a close result which could go either way. If we get a close result the election will probably be contested by the loser and this will leave the US without Government while the Supreme court decides the winner. This will ignite a general USD rally and will send the Euro lower.

Speculators Hold a 2 Year Long Extreme in Terms of Euro Long Positions

We already have speculators holding a 2 year high in terms of long positions and commercial smart money has gone heavily short. In terms of the divergence between the two groups, it’s the biggest since 2017. Risk on has supported the euro but now we expect a move to risk-off and speculators to exit on stop and trigger a major trend change to the downside in EUR/USD

Technical Levels

EURUSD 28/10: We have seen sideways action since August in this pair and volatility has been low but we think this is about to change with speculators on the COT Net Traders Positions holding a 2 year high in terms of long positions. We expect a major break to the downside and longer term a move back to the 1.1000 level, We view the EUR as a sell with stop protection well back from the 1.1900 level.

COT NET TRADERS POSITIONS: We have speculators with their largest long position since 2017 and Dealers smart money hedgers are heavily short. In 2017 the big divergence warned of a big move down on the EUR of 1000 pips and the current divergence warns of another big break to the downside.

 

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