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Forex: Will next week’s ECB Rate decision end the range bound behavior?

FXstreet.com (Barcelona) - The EUR/USD continues its range bound behavior, initially selling off due to weak economic data out of Germany but managing to crawl its way back and prevent any serious declines below 1.2954. Currently, the pair is well bid during the Asia session up another 26 pips at 1.3042. The recent price action has many wondering what the reaction of the pair will be to next week’s ECB meeting on May 2nd at 11:45GMT.

According to analysts at Rabobank, “The main event in Europe was the release of Germany’s IFO which followed a similar pattern to the ZEW in April, remaining net positive but moving lower. The Current Assessment index fell to 107.2 from March’s 109.9. A smaller decline to 109.5 was anticipated. The more forward-looking Expectations sub-index fell to 101.6 from March’s 103.6.

They went on to comment, “This IFO shows continued expansion early in 2Q but does remind that Europe’s largest economy is not gaining momentum. With this latter comment also true of the broader eurozone economy, there is now heightened interest in the coming ECB policy meeting and we rate it likely the ECB will ease policy at this 2 May meeting via a 25bps reduction in its official interest rate.”

Some analysts believe the recent strength of the EUR/USD has been helped by the equity market continuing to rise in the face of the weak economic data. However, in the end they believe the ECB Monetary policy will be the real catalyst and eventually send the pair lower.

According to Kathy Lien of BK Asset Management, “The resilience of the euro has been remarkable. Between the lower German IFO, PMI and ZEW surveys, the euro should be trading much lower. However each time the currency tried to break below 1.30, it bounced back quickly. The rise in European equities, expectations for Japanese purchases of European bonds and political progress in Italy is helping the currency but we think it is only a matter of time before further losses are seen.”

She went on to add, “While there are no major Eurozone economic reports between now and the ECB meeting next Thursday, the euro could start selling off at the beginning of next week (if not sooner) on the mere expectation for more stimulus. In other words, we don't think EUR/USD will be able to hold 1.30 for much longer. A number of ECB policymakers will be speaking tomorrow so keep an eye out for more rate cut talk.”

From a technical perspective, the recent price action over the last two weeks has been beyond frustrating for many market participants. The daily chart of EUR/USD continues to show a lack of momentum with the RSI (14) having consolidated between the 40-60 levels since early April. Until either side one of these levels is taken out, expect choppy price action to resume in coming sessions.

According to Val Bednarik of FXStreet.com, “A fresh weekly low, this time at 1.2954, was not enough to trigger further sells in the EUR/USD. Fundamental data both sides of the shore disappointed this Wednesday, giving not much clues on direction either, while US stocks traded in tight ranges ending up barely below their opening. As for the EUR/USD, short term bias remains negative, with a descendant trend line now standing around 1.3030/40 area, offering short term resistance.”

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