Today is the beginning of the EU Summit meeting and the main question on traders’ minds will be whether or not the Euro currency will continue to be used in its current form. Up until this point, we have not seen comments from the ECB that are suggestive of major changes in the currency but there is still potential for a surprise as the ECB has no direct authority over the decisions that will be made during the Summit meeting. This is not to say that the ECB has no influence, however, and there will be another meeting with Mario Draghi (the new ECB President) and Merkel/Sarkozy after the monetary policy statement is released today.
The ECB is still expected to cut Eurozone interest rates by 25 basis points today but most analysts are expecting additional cuts in the coming months, so there is a possibility we will see a 50 basis point decrease. Any move like this (or even verbal confirmation that we will be seeing additional rate cuts early next year) will lead to selling pressure in the EUR/USD and we could see another test of the yearly lows near 1.31. The next few trading days are expected to be almost entirely driven by news headlines and comments from finance officials, so this could lead to some unpredictable price movements to end this week.
In the UK, the Bank of England will have its monetary policy meeting at roughly the same time but no changes in interest rates or asset purchases are expected (though some surprises here are possible as well, given the poor macro data reports released recently). The total influence of the meeting is more likely to be governed by the general tone of the policy statement and a dovish bias should bring a reversal of yesterday’s rally in the FTSE and GBP.
Earlier yesterday, the RBNZ left its base rate steady at 2.5% (as expected) and revised lower their growth forecasts for the next two years. In addition to this, the Australian jobs data came in much worse than expected, showing a decline of 6,300 jobs (where an addition of 10,000 was the consensus estimate), and the unemployment rate rose to 5.3%. The data is discouraging, to say the least, and these numbers will lead to new speculation from analysts that the latest rate cut from the RBA will not be the last, and many estimates are now calling for another 25 basis point decrease in February.
The EUR/USD is caught in a symmetrical triangle on the hourlies, with prices now testing the resistance line from the beginning of the week. Indicators have flattened out at neutral levels, so it is looking like the next move will be explosive. Key levels to watch are 1.0330 and 1.3450. Wait for a break of the triangle before committing to new positions.
The S&P 500 is now seen as a range trade, with prices approaching resistance at 1265. Indicators are bearish and on the verge of a negative cross on the 30 minute charts, so current levels are acceptable sell regions, targeting support near 1245. Stops can be kept tight, as an hourly close above 1265 would be a very bullish signal in the short term.