Summary:

  • The ECB meeting (Thursday, decision 12:45pm BST, conference 1:30pm BST) is the most anticipated market event in October
  • The Bank is expected to extend the QE program for 9 more months but reduce a scale of purchases.
  • A scale of reduction could be crucial to market reaction on EURUSD and DE30

The ECB meeting is by far the most anticipated market event in October. In this analysis we take present the importance of the decision, possible surprise scenarios and take a look at the charts of the two markets that could see the biggest reaction: EURUSD and DE30. 

Why is the ECB meeting important?

The ECB sets up monetary policy in the euro zone. Interest rates are crucial for currencies and for equity valuations. The markets tend to react the most when a central bank changes policy direction. The euro zone economy has seen a robust recovery this year yet the ECB conducts ultra supportive policy of negative interest rates and bond purchases worth 60 bilion euros per months. This will change next year but we do not know to what degree and that’s why the meeting is so important. Normally expectations for higher interest rates are positive for a currency but not so much for the stock market. 

What do markets expect?

The consensus sees the ECB extending the QE program for another 9 months (until the end of September 2018) albeit with smaller purchases of 20 to 40 bilion euros per month. Obviously that’s a fairly broad range and it will be important to see where the final number will land (40 billion would be see as dovish, 20 billion hawkish and 30 billion perhaps neutral). The ECB is expected to assure investors that rates will remain unchanged long after the QE program end and also not to pre-commit to end the QE at the end of this 9 month period. 

Possible dovish surprise scenario

It seems like expectations ahead of the ECB are already fairly dovish so could the Bank undershoot? We see two possibilities here. The ECB can announce extension for the full 2018. Even if purchases are much smaller markets could be nearly certain that rate hike will be delayed until 2019. The ECB may also announce extension but leave investors short in details.

Possible hawkish surprise scenario

Do notice that when the Fed announced its tapering it made clear that at the end of extension the purchases stop altogether. This is not expected from the ECB that could prefer to leave another extension option on the table. By saying that the QE ends with this extension the ECB could send a hawkish signal.  

Technical outlook:

EURUSD

The EURUSD is no longer in an uptrend on the daily interval – a trend line was broken here in September and one could see a mature head and shoulders formation ready to be executed. However, a support at 1.1670 has been strong thus far and this is where a neckline of the formation is. If the ECB meeting triggers this formation one could look for a support at around 1.14. 

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The impact of the ECB could be crucial for EURUSD where a head and shoulders formation could be triggered. Source: xStation5 

DE30

After rising to around 13000 at the beginning of October the DE30 has remained in a narrow consolidation. Some traders could perceive this as a sign of weakness but it must not be the case – a previous consolidation at around 12600 concluded with a break higher. We can see a strong support at 12900 points and bears should be careful until it’s broken. 

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DE30 has been stuck in consolidation. It could be exposed if the euro gains following the ECB meeting. Source: xStation5