EUR/USD moves below key support ahead of ECB interest rate decision

on Sep 8, 2020
  • The EUR/USD pair dropped below a crucial support as traders waited for the ECB interest rate decision.
  • Data from Eurostat showed that the Eurozone economy contracted by 11.8% in the second quarter.
  • Another data showed that employment fell by 3.1% in Q2.

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The euro (EUR/USD) is falling for the sixth consecutive day as traders react to the mixed economic data from Europe. The currency is also responding to a relatively strong US dollar and the upcoming monetary policy meeting by the European Central Bank (ECB).

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EUR/USD falls after mixed economic data from Europe

European economy recession confirmed

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The European economy entered a technical recession in the second-quarter as countries in the bloc announced strict stay-at-home orders. According to Eurostat, the bloc’s economy contracted by 11.8% in the second quarter, leading to a year-on-year decline of 14.7%.

Analysts polled by Reuters were expecting the bloc’s economy to contract by 12.1% (QoQ) and 15% (YoY), respectively. The economy had contracted by 14.7% in the first quarter.

According to Eurostat, this contraction was because of a 12.4% decrease in household consumption. The consumption had fallen by about 4% in the first quarter. Similarly, fixed capital investments fell by 17% as companies focused on capital preservation. Exports fell by 18.8% as many companies reduced their operations and international market weakened. A slight boost in government spending partially offset these declines.

The worst-performing countries in Europe were Spain, Croatia, Hungary, and Greece, whose economies fell by more than 14%. France, Italy, and Germany contracted by 13.8%, 12.8%, and 9%, respectively.

Still, while this was region’s worst quarter in decades, it was better than that of its close peers. For example, the American economy contracted by more than 32% in the second quarter. And earlier today, data showed that Japan’s GDPdeclined by more than 28%. It also outperformed the UK, whose GDP fell by more than 20%.

Focus shifts to ECB decision

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The EUR/USD pair has also dropped ahead of the important ECB decision. The bank will start its meeting tomorrow and deliver its rate decision on Thursday. Analysts polled by Bloomberg expect that the central bank will leave the interest rate unchanged. They also expect that the bank will not tamper with its pandemic purchases; for now.

In a statement, analysts at ABN Amro said that they expect the bank to express its readiness to ease further. Their Goldman Sachs peers expect the bank will talk about the stronger euro. For starters, a stronger euro is usually a bad thing for Europe, which makes most of its money from exports. Still, analysts at Morgan Stanley will be waiting for indications that the bank will act sooner. The statement said:

“After last week’s deflationary surprise, and with the drag from a stronger euro, we will be looking for any signal the ECB may act earlier. Perhaps at the December forecast meeting, to defend the credibility of its inflation target.”

This will be the first rate decision by the ECB after Jerome Powell delivered his speech at the virtual Jackson Hole summit. In his statement, he said that the bank would be ready to allow inflation to move above the 2% target.

EUR/USD technical forecast

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EUR/USD technical analysis

The daily chart shows that the EUR/USD pair reached a year-to-date high of 1.2017 in August. Since then, the pair has been in a steep downward trend, and is now trading at 1.1787. Notably, the pair has formed an ascending equidistance channel that is shown in blue. Today, the pair has managed to move below the lower support of this channel, which is a signal that bears are prevailing.

Therefore, I suspect that the pair will continue moving lower as they target the next level at 1.1687. This price is along the 50-day exponential moving average and the lowest level on August 3.

EUR Forex