EUR/USD, EUR/JPY look ready to rip despite an anticipated ECB rate cut

The ECB is expected to cut all three interest rates today by 25 basis points (bp). This would mark the first cut in the deposit facility since September 2019, while the lending facility and refinancing rate were last cut eight years ago. Unless the ECB throws a curveball, this should see the refinancing rate cut to 4.25%, placing it below the Reserve Bank of Australia's (RBA) relatively low cash rate of 4.35%.

However, it is the Bank of Canada that can claim to be the first major central bank to cut rates this cycle, by just one day. Their 25bp cut from 5% to 4.75% still leaves room for another cut or two this year although, as predicted, they did not commit to further cuts and will likely continue to consider easing on a per-meeting basis.

I have said it before, and I’ll say it again: I doubt the ECB will commit to further cuts at today’s meeting, which may disappoint those expecting a more aggressive stance. It makes more sense for them to maintain data dependency and consider further cuts on a per-meeting basis, given the recent mixed data from Europe. Mixed views from ECB members also make it less likely they’ll have a clear outlook at the meeting. However, traders may be able to assess the potential of future cuts via the revised staff forecasts. Should they estimate inflation to take longer to cool, it becomes less likely they’ll cut once or twice more, as markets are trying to price in. This could send the euro higher.

EUR/USD futures market positioning from the COT report:

It is probably a good time to remember that futures traders have been increasing their net-long exposure to EUR/USD in recent weeks. Sticky inflation has certainly played a part, as have renewed bets that the Fed could cut rates in September. That said, exposure is not particularly bullish, but it does show a less bearish view of the euro in recent weeks as traders trimmed shorts and initiated fresh longs. This further suggests the euro could trade higher if the ECB simply cuts rates by the expected 25bp and provides no clear guidance on future actions.

Implied volatility is rising for FX pairs ahead of today’s ECB meeting.

EUR/USD technical analysis:

The US dollar continued to weaken in today’s Asian session, helping EUR/USD break above Wednesday’s high. The daily chart shows that while EUR/USD struggled to hold above 1.09, a two-day pullback may have ended with a doji, and prices are now above it. Perhaps the pullback is over.

The trend structure is clearly bullish, and while not textbook perfect, we could still view this as a breakout from a flag pattern or a three-wave correction in May.

The 1-hour chart shows momentum turning higher after finding support at the 10-bar EMA. It seems prices want another attempt at the 1.09 handle as we approach the European open. From here, bulls could seek dips toward the 1.0879 high-volume node in anticipation of a break above 1.09. However, the bullish trend structure on the daily chart suggests EUR/USD could be headed for 1.095.

EUR/JPY technical analysis:

A risk-on tone to markets saw the yen depreciate across the board on Wednesday. And should the ECB disappoint bears today, the bullish structure on EUR/JPY seems appealing. A bullish inside day formed to see prices recover bac above the 20-day EMA, although resistance was met at the 2008 high. Yet the 20-day EMA is currently providing support in today’s Asian session

The 1-hour chart shows prices have drifted lower from the 2008 high, and a small bullish divergence formed on the RSI (2) ahead of a bullish engulfing candle at the daily pivot point and 38.2% Fibonacci ratio. RSI (14) has also moved back above 50 on this timeframe.

The bias is to seek dips down to the 20-day EMA in anticipation of a move up to 170, a break above which brings the daily E1 pivot and 170.72 high into focus.

-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge