ECB Meeting Talking Points:

The July European Central Bank rate decision and policy meeting will arrive on Thursday, July 25 at 11:45 GMT.

Sluggish and muted inflation expectations have raised the odds of the ECB taking dovish policy actions this week – but that much is already expected by FX markets.

Recent changes in r etail trader positioning suggests that EURUSD could drop in the coming days.

Join me on Mondays at 7:30 EDT/11:30 GMT for the FX Week Ahead webinar, where we discuss top event risk over the coming days and strategies for trading FX markets around the events listed below.

07/25 THURSDAY | 11:45 GMT | EUR European Central Bank Rate Decision

Speculation has increased in recent weeks, following ECB President Draghi’s speech at the ECB Forum in Sintra, Portugal in late-June, that fresh stimulus measures would soon arrive. Sluggish growth conditions, and muted inflation expectations have markets toying with the notion that the ECB’s Governing Council could cut interest rates at the July ECB meeting.

According to separate Bloomberg News and Reuters surveys of economists, the ECB will not move on any of its key interest rates this week – the main rate, the marginal lending facility, or the deposit facility rate. Yet a look at market pricing as derived from Eurozone overnight index swaps suggests otherwise:

European Central Bank Interest Rate Expectations (July 22, 2019)

According to overnight index swaps, there is a 51% chance that the ECB will cut rates by 10-bps this week. This is not exactly convincing, overwhelming evidence; indeed, this strategist prefers to wait until markets price in at least a 55% chance before we can begin to make an interest rate forecast call with any conviction.

But with markets essentially predicting a coin flip’s chance of a rate cut – if we’re using implied probabilities as a proxy for the portion of the market correctly positioned for the July ECB meeting – then approximately half of all market participants will have to readjust their positioning come Thursday. The Euro appears destined for significant volatility in the second half of the week.

Pairs to Watch: EUR/GBP, EUR/JPY, EUR/USD

EUR/JPY Technical Analysis: Daily Price Chart (September 2018 to June 2019) (Chart 1)

EUR/JPY begins the week of the July ECB meeting on soft footing, having posted two consecutive closes below the rising trendline from the 2012 and 2016 yearly swing lows. Bearish momentum has firmed up in recent days, with price comfortably below the daily 8-, 13-, and 21-EMA envelope in bearish sequential order. While Slow Stochastics are buried in oversold territory – often a sign of significant bearish momentum – daily MACD only recently turned lower again below the signal line.

Should EUR/JPY break through the June swing low at 120.78, the floor would open for prices to decline towards the 2019 low established during the Yen flash crash in January at 118.62. Otherwise, if bulls are going to retake control, a return above the descending trendline from the October 2017 and March 2019 highs is required; that could come above the 23.6% retracement of the 2018 high/2019 low range at 122.20.

IG Client Sentiment Index: EUR/JPY (July 24, 2019) (Chart 2)

EUR/JPY: Retail trader data shows 72.3% of traders are net-long with the ratio of traders long to short at 2.61 to 1. In fact, traders have remained net-long since April 25 when EUR/JPY traded near 125.662; price has moved 3.8% lower since then. The number of traders net-long is 2.0% lower than yesterday and 13.2% higher from last week, while the number of traders net-short is 3.6% lower than yesterday and 11.7% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/JPY prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/JPY-bearish contrarian trading bias.

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher, email him at cvecchio@dailyfx.com

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