Should you buy the euro ahead of the ECB’s interest rate decision?

Three major central banks will release their policy decisions this week – the Federal Reserve of the United States (Fed), the European Central Bank (ECB), and the Bank of Japan (BOJ).

Naturally, market participants try to take advantage of economic news releases prior to the decisions to position on the right side of the market.

Today is as confusing as possible for those looking at the euro and the ECB. Manufacturing and services PMI data across Europe disappointed, not to mention the Spanish general elections ended up uncertain.

The French Flash Manufacturing PMI came out at 44.5 vs. 46.1 expected. Flash Services PMI data also disappointed – coming out well below the 50 mark.

But more important was the German Flash Manufacturing PMI, coming out at 38.8 on 40.9 expected. Services also declined – a terrible combo ahead of an ECB meeting where another rate hike is priced in.

Germany Manufacturing PMI at a 38-month low

The German economy has a bad start to the year’s third quarter. The manufacturing sector leads the downturn, as new orders and backlogs of work decline faster than during the initial COVID-19 wave at the start of 2020.

Traders should keep in mind that a print below 50 reflects a contractionary sector and today’s data shows that the manufacturing PMI in the euro area’s largest economy dropped to a 38-month low.

Let that sink in for a minute…

The disinflation momentum is picking up steam ahead of the ECB meeting

The focus, therefore, shifts to the ECB’s meeting. More precisely, it is not about what the ECB will do on Thursday with the key interest rates – a 25bp rate hike is already priced in.

Instead, it is about the message it will send during the press conference. In the past, PMIs have been so weak and the ECB hiked (e.g., in 2008 and 2011), but immediately reversed those hikes.

EUR/USD impulsive move just ended

The EUR/USD exchange rate is on focus this week. After all, both the Fed and the ECB will announce their decisions.

Yet, it is difficult to make a bullish case for the pair. Besides the weak fundamentals discussed earlier, the technical picture does not look better.

Those familiar with the Elliott Waves theory may recognize that a five-wave structure ended recently. According to the theory, this is an impulsive move, and the recent rally was nothing but the last segment of it.

In other words, the EUR/USD should be on its way to the 1.06 area – providing this impulsive wave scenario holds. To hold, the EUR/USD should not make another high this week above the top of the 5^th wave.

All in all, expect the US dollar to flex some muscles this week and the EUR/USD exchange rate to be one of the markets to reflect it. Sellers should push for more on a break of the 2-4 trendline, while buyers should emerge around the 1.06 area. On the flip side, any more above 1.1280 should invalidate the bearish scenario.