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Forex: EUR/USD – The week we’ve all been waiting for? ECB and Fed meetings on tap

FXstreet.com (Barcelona) - EUR/USD has started the week off on a strong note, benefiting from the headlines that Enrico Letta has been elected as the new Italian Prime Minister. At one point earlier in the session, the pair had traded as high as 1.3068, but is now back to consolidating near the opening print of 1.3050.

According to analysts at FXStreet.com, “After two months of an irreconcilable political deadlock, Enrico Letta, 46, and member of the centre-left Democratic Party (PD), was sworn in as new Italian Prime Minister on Sunday. Letta, who has managed to pull together a 21-member Cabinet, while becoming the third youngest Prime Minister since World War II, nominated an unprecedented seven women to his Cabinet. Fabrizio Saccomanni was appointed finance minister, taking on the responsibility to overlook and bring forward much needed economic reforms to the economy.”

The main event later this week will be the upcoming ECB Monetary Policy meeting on May 2nd at 11:45 GMT. Analysts have been pointing to the weak economic data from Germany, and continued dovish comments from ECB officials as a good reason to expect an adjustment to current policy.

According to analysts at UBS, “The European Central Bank is likely to cut interest rates at this month's Governing Council meeting. Eurozone and German PMI were both weaker than expected, the latter having been signaled by recent weaker prints in Poland's PMI data that acts as a leading indicator for Germany's manufacturing series. In addition German IFO fell more than two points to 104.4 in April.”

Furthermore they added, “UBS Economics expects a 25bps reduction in the refinance rate to 0.50%. That is likely to push the euro down into a lower 1.28-1.30 range against the dollar. The ECB is unlikely, however, to cut its deposit rate below zero just yet.”

Some analysts believe the ECB meetings may end of being a positive factor for the pair. Recently, the strength in EUR/USD has been impressive as it continues to shrug off negative headlines.

According to Kathy Lien of BK Asset Management, “the EUR/USD continues to be weighed by speculation of an interest rate cut at the upcoming meeting in May. The move may provide a knee jerk reaction lower, but ultimately may prove to be positive for the pair if it helps to stimulate the region's moribund economy. For now however the EUR/USD continues to feel the downward pressure and may slip below the 1.3000 level in North American trade if risk off sentiment gathers steam.”

From a technical perspective, the continued lack of trend is leading to mixed signals on the charts. This is likely putting many market participants on the sideline until there is more of a clear picture in regards to current trend. For example, on the daily chart there appears to be a possible “bull flag” continuation pattern forming which makes sense after the sharp move higher in early April. However, looking at the weekly chart one can also make the case for a massive head & shoulders topping pattern which would have bearish implications. Additionally, both short term moving averages and the RSI (14) also remain in neutral technical set up.

All in all, sometimes its best to realize when the charts are not painting a very clear picture, which is what the EUR/USD seems to be saying at the moment. Keep an eye on the upper (1.3200) and lower (1.2950) ends of the recent trading range for clues to the direction of the next major move.
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