Anyoption contributor Terry Chrisomalis takes a look at the week ahead in currency trading. You can see more of Terry’s analysis on the Anyoption blog.
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The EURUSD pair looks to have a very volatile week ahead as the Fed meeting is just around the corner. The past week also saw a decline, thanks to the ECB keeping a hold pattern on its economic policy. The dollar has been in a major decline ahead of the Fed meeting which is set to take place this Tuesday and Wednesday. It has dropped months ahead of the meeting, and just in the last month alone has been trading in a tight range.
Important Level
An important level to watch this week is the EURUSD pair is at the 1.12 level. That is because it is the 61.8% fib retracement level, and is also the resistance level marked for well over one year now. Any break in that level will indicate a more bearish tone going forward. Of course this will all be reliant on whether the Fed presses a more dovish or bullish tone with potential interest rate hikes. With a bullish tone from the Fed, additional interest rate hikes would cause the dollar to surge higher. This in turn would cause the EURUSD pair to falter below the 1.12 level. This is where put options would be useful in this currency pair. On the flip side, if the Fed takes a more dovish stance then the dollar would dip further. In this scenario, the EURUSD pair would go higher, and call options could be used here. Whether using put options or call options investors would both follow the 1.12 level as a resistance point.
ECB Puts A Halt On The Euro
The Fed isn’t the only thing that dictates the direction of the EURUSD pair. Another factor that affects it is Eurozone monetary policy. Mario Draghi last week was deeply disappointed because he had no new monetary measures to announce. Monetary policy needs to be initiated to keep economies at a good growing pace, and to also help alleviate any weakness as well. Mario Draghi has put in place lower interest rates in an attempt to help spur economic growth in the Eurozone. The problem is that none of the countries have taken advantage of such lower interest rates. They were supposed to implement policy reforms of their own. Such policy reforms would have been to reduce taxes, and cut entitlements down. Instead, European countries chose to continue on the same policy path leading to lower than expected growth. Mario Draghi made this very clear in his remarks on Thursday:
With rare exceptions, our monetary policy has been the only policy in the last four years to support growth.
It is hard for Draghi and the ECB to keep the Euro currency afloat. How does this affect the EURUSD pair? This affects it, because a Eurozone economy that is shrinking, puts enormous pressure on the Euro. This causes the Euro to trade down, and thus the EURUSD pair lingers in a downward fashion to lower levels. Unless the Eurozone can band together to implement policy reforms, the ECB is running out of options to help boost the EURUSD currency pair.
One Last Hope
Even with the 19 Eurozone countries not responding with appropriate reforms the ECB may be able to take additional action if necessary. That means if the Euro starts to falter, then the ECB might have to interject. This could especially be true if the dollar starts to gain more against the Euro. The ECB is already buying 80 billion Euros in bonds from banks every month. The buying of bonds is expected to go well into March 2017. The hope here is that the Euro currency will stabilize, which should in turn keep the EURUSD pair afloat.