What’s Happening?

This has the potential to be a big week for EURUSD. The pair is already active on the results of the Italian referendum and the Austrian presidential election. Technically, it has broken out of a base. EUR may remain in focus through the week particularly around the ECB meeting where the future of the central bank’s QE program may be determined. Market action in the US Dollar, which appears to be peaking and activity related to Italy’s political or banking situations may also influence trading in the Euro this week. 


Technicals:

The bottom fell out from under EURUSD following the US election. The pair quickly collapsed from near $1.1300 toward $1.0500 but the big plunge left it very oversold with the potential for a bounce. In recent weeks, the pair has been forming a saucer bottom between $1.0500 and $1.0685 a 23% retracement of its recent nosedive. 

The new week has started on a positive note. An early drop toward $1.0500 successfully retested support there, completing a bullish double bottom. Since then, the pair has soared, breaking out over $1.0685 to complete its base and advancing on $1.0703. RSI advancing on 50 also indicates that momentum is turning upward with confirmation of an upturn pending. 

Support has moved up to its $1.0685 breakout point from $1.0630. Next potential upside resistance may appear at a Fibonacci cluster in the $1.0770 to $1 0800 area. 


Fundamentals

There are a lot of things happening currently which may influence this week’s trading in the Euro. The decisive rejection of reform measures in Italy that forced led PM Renzi to resign sent EUR lower initially. 

This has been more than offset, however, by news out of Austria that the Euroskeptic candidate there lost the Presidential election. This has taken some of the political risk pressure off the Euro as it indicates the establishment isn't going to go down without a fight. It also appears that even though Italy’s opposition Five Star party has called for new elections it would not be simple for Italy to leave the Eurozone or the EU, especially with the country’s banks still struggling and potentially needing a bailout. 

EUR may also benefit this week from signs that the US Dollar may be peaking. Last year the USD peaked in early December ahead of the Fed’s decision to raise rates. With a December hike pretty much a done deal, traders are now looking at how many hikes are likely in 2017. Before the election traders were looking at two hikes next year but the dollar is now pricing in four or five. Based on this the USD appears to be ahead of itself and vulnerable to a downward correction which could lift some of the pressure that has been weighing on the Euro lately. 

Part of the pressure on the Euro has been a concern that the ECB (very dovish) and the Fed (increasingly hawkish) have been heading in opposite directions. This week’s ECB meeting could be a key turning point in that trend. 

The ECB’s current QE program is scheduled to end in March 2017.  This week, the ECB is expected to announce its plans for asset purchase stimulus. There are several options including:

    Do nothing and let the program end as scheduled 

    Extend the program but reduce the pace of purchases (tapering)

    Extend the program and maintain the current level of purchases

    Extend the program and increase the pace of purchases

The first two would be seen as a hawkish shift and could support further gains. The third option extend the status quo would likely not have much of an impact. The last option would likely be seen as a dovish turn and could send EUR back downward. 

Any comments from the central bank related to the health of the European economy and the banking system may also have an influence on Euro trading. 

The ECB decision is due on Thursday at 7:45 am EST (12:30 pm GMT), followed by the press conference with ECB President Draghi at 8:30 am EST (1:30 pm GMT) 


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