EUR/USD May Target 1.3750 If ECB Signals October Hike

SEP 6
ECB Rate Decision (07:45 EST; 11:45 GMT)
ECB?s Trichet Speaks (08:30 EST; 12:30 GMT)

Expected: 4.00%


Previous: 4.00%

How Will The Markets React?
On Thursday, the European Central Bank will issue their long-awaited interest rate decision, and regardless of the result, price action should prove to be wild in the fixed income, forex, and equity markets. Just a month ago, ECB President Jean-Claude Trichet reinserted the phrase “strong vigilance” back into his rhetoric, and since the central bank began raising interest rates, these two words have preceded a rate hike with 100 percent accuracy. Over the past three weeks, however, Trichet has started to backpedal as volatility in the financial markets has weakened the case for an aggressive policy tightening stance. On August 28th, Trichet commented, “What I said on the second of August was before the market turbulence?the next assessment is to be made on September 6. We will then have to assess all of the elements of?the economy. We will assess the risks?and will take the appropriate steps at that moment.” As a result of this statement, the ECB is now widely expected to leave rates steady at 4.00 percent. However, the biggest market response will be to Trichet?s commentary, as traders will be looking for signals that he will hike later in the year (such as using the term “strong vigilance”).
For more on the ECB?s next rate decision, along with the possible outcomes of other central bank meetings this month, click here .
Bonds - 10-Year German Bund Futures
Bunds have maintained their uptrend in a bid to get back above the 113.70 level, and bulls could well target the 114.25 high from last week though 114.16 could continue to hold as resistance. The impressive bounce off the ascending trendline at 113.42 and the break of the recent range highs should give bulls renewed impetus, however, the ECB meeting on Thursday could throw a wrench in the technical picture, as signs that the central bank will move to hike rates in October could send bunds plummeting. On the other hand, the combination of jittery equity markets and a neutral stance by the ECB could give the contracts a push to test resistance.
[B]10-Year German Bund Futures (Daily Chart)

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FX - EUR/USD
Despite volatile price action over the past few days, the EURUSD pair remains range bound, as mixed risk averse sentiment keeps traders on edge. Outside of the 1.3565 - 1.3685 range, the next level of resistance sits at the 78.6% fib at 1.3750, which could be the pair?s next bullish target. EURUSD faces massive event risk on Thursday as the ECB will issue their rate decision at 7:45 EST when the bank is anticipated to leave rates steady at 4.00 percent. However, ECB President Trichet?s press conference at 8:30 EST will draw the most attention, as traders will be looking for clues as to whether the bank will hike or remain neutral in October. The reinsertion of the phrase “strong vigilance” will prove hawkish and could drive EURUSD to target 1.3750. On the other hand, a steady hand at this meeting along with signs that the monetary policy tightening cycle is complete could push EURUSD down towards support at 1.3565, with sharp declines taking on 1.3485.
[B]EUR/USD (Daily Chart)

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Equities - Xetra DAX 100
The German Xetra DAX 100 index gave up 1.73 percent on Wednesday to close at 7,588.03, as traders remained skittish ahead of the European Central Bank?s rate decision on Thursday. Nevertheless, the index?s uptrend remains intact, with trendline support below at 7,469. However, with the ECB now anticipated to leave rates steady at 4.00 percent, a surprise rate increase or signals that the bank will indeed implement a 25 basis point hike in October could send the DAX plummeted to or below that support level. On the other hand, if the ECB implies that they will not increase rates any further and will stay neutral throughout the rest of the year, equities could rally in response towards resistance at the 61.8 percent retracement level of the decline from the July highs at 7,784.
[B]Dow Jones Industrial Average (Daily Chart)

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Written by Terri Belkas, Currency Analyst of DailyFX.com