EUR/USD tested 1.0825, but found some support because of the general weakness in the US dollar.
The highlight of the week will be the European Central Bank’s meeting on Thursday. The ECB President Mario Draghi said this week that the region’s growth and inflation outlook became worse and that the regulator will have to consider these negative developments at March meeting. European inflation turned negative in February: consumer prices fell by 0.2%.
As a result, the possibility of more easing from the ECB on March 10 is almost 100%. The main question is how much the ECB will do. Traders are quite sure of a 10-basis-point cut. Other options available to the central bank include technical changes to quantitative easing (QE) program or an increase in monthly QE purchases from the current level of 60 billion euro. It’s clear that larger QE will drag the euro down, while the minor changes won’t be an obstacle for the bulls. In addition, European banks complain that negative interest rates are affecting their profitability, so the ECB may announce a multi-tier deposit rate system. Such step will encourage euro-funded carry trade and, consequently, increase bearish pressure on the euro.
In our view, the ECB remembers how it disappointed the market in December when it delivered a too small easing package and will try not to repeat its mistake. The base scenario thus will be to sell the single currency on the event. The euro is vulnerable versus Australian dollar and other higher-yielding commodity currencies.
Resistance is at 1.1050, 1.1165 and 1.1250. Support is at 1.0830 and 1.0710.