EITHER WAY - It's ECB time! So the market is expecting a QE package from Mr. Draghi somewhere between EUR500-750B. How the Euro will react to whatever the result is a completely different affair. At this point, it would be hard to say that a larger than expected package would be definitively Euro bullish or bearish. One could argue both ways really. If the package is larger, you could say the Euro will sell off on the massive QE and depreciative impact on the Euro. At the same time, you could just as easily make the argument that a large package means the ECB is getting a handle on things and is prepared to do what it must, which in turn could inspire a vote of confidence from the market and open a Euro rally. Similarly, if the package is smaller, you could say the Euro will rally as the ECB won't be pumping as much out of thin air into the system, but just as easily make the argument the Euro will sell off on the disappointment the ECB needed to more.
TAKEAWAY - So what's the takeaway? The takeaway is that from the perspective of analyzing direction in the context of the size of the QE package, your guess is as good as mine. However, with that said, it is also important to understand the broader macro picture and the technicals. Still, looking at these variables doesn't exactly make it easier. On the macro side, whatever happens tomorrow, there is no denying the ongoing divergence between the ECB and Fed, and the fact that the Fed is moving in a different direction than the ECB (and all other central banks). Ultimately, this should continue to translate into US Dollar strength going forward. At the same time, technically, the Euro is well oversold at the moment and due for a healthy corrective bounce.
REALISTIC OUTCOME - I suppose a realistic outcome over the next week or so is for the Euro to find some form of a bottom and rally for a bit before succumbing to the macro themes of monetary policy divergence and risk off price action. But in the short-term, such a technical correction could easily be triggered by a number of factors. As per above, what the ECB does tomorrow could trigger a Euro rally, while any signs from the Fed that it will hold off on a rate hike in 2015, could also open a Euro bounce. We shouldn't forget about the weekend Greek election risk. At the moment, with anti-austerity Syriza expected to win, there has been a lot of bearishness priced into the Euro. But perhaps the new government won't be as bad for the Euro as markets have been pricing.
GUN TO THE HEAD - If I were forced to be looking for a trade now, it would be to look for an opportunity to buy EURUSD with all the weakness we have seen, in anticipation of a reversal as we always see with markets when something is overextended. So I will keep looking for that long EURUSD entry over the coming sessions knowing full well this is a a short-term view and the better play over the medium-term, will be to sell the Euro into any meaningful rally. In the best of worlds, we catch a nice entry on a Euro long and then ride it for a week or so until a good sell opportunity presents. But that is in a perfect world :).