EURUSD made a two-year high on the back of the European Central Bank (ECB) decision not to cut interest rates any further as ECB President Mario Draghi saw no need after acknowledging the slow, weak economy. Price action exploded to the upside, settling and consolidating between 1.3850/60 before ending the week above 1.3900.
“There’s still a possibility that [Draghi] will announce some measures on the liquidity side which are usually not announced before the press conference,” said KBC strategist Piet Lammens. Draghi focused on the positives while not spending too much time on the negatives. Recent mixed data was outcast to the ECB head’s comments, but the euro increasing to multi-level highs will pose a risk to price stability.
With borrowing costs oddly at multi-year lows, in countries like Spain and Italy, Draghi has little need to inject more liquidity. “Looking ahead, the ongoing recovery is expected to proceed, albeit at a slow pace,” said Draghi at last week’s press conference (thought I was listening to Ben Bernanke for a second). Recent economic confidence and PMI data does suggest modest strength, and the eurozone gross domestic product grew at .3 percent in the fourth quarter; but, “the persistence of a strong euro, weak credit dynamics, sizable slack — capacity utilization and employment — and indications of a gradual drift lower in long-term inflation expectations will need some monetary-policy response soon,” said Guillaume Menuet, economist at Citigroup.
The ECB could be backing themselves in a corner, much like the Reserve Bank of Australia (RBA). Both central bank governors have made it clear that increasing strength in the exchange-rates are not exactly positive for their economies, but there is not much they can do at this point. “The fact that Draghi explicitly mentioned the exchange-rate impact on inflation is in our view a clear signal that the ECB would not be pleased with a further strengthening of the euro,” said Carsten Brzeski, economist for NG Group NV.
There was a small group of analysts expecting some sort of change in policy (I included). With central banks cutting rates to all-time lows, there will be a period of “wait and see” in order to save rate cuts on significant data deterioration.
The pent up bullish momentum sent EURUSD to an intraday-high of 1.3914 before pulling back on positive non-farm payroll data out of the United States. Price action has been trending higher within an ascending channel on the daily chart, and the channel resistance has held up well against the violent volatility.
The trend’s momentum is strong given the ADX extending upwards, and the + DMI is sharply higher. The RSI, at 65, still has room to move higher before traders would label it overbought.
The daily chart, extended out by three years, gives a better idea of potential upside targets once price action breaks out of the channel. Price action will see some resistance nearing 1.3940, slightly outside of the channel. EURUSD could see 1.4020 on a continuation of trend.
Although, profit taking could be seen or a minor price correction before a continuation upward. Look for support levels at 1.3820 and 1.3770. Deeper support will be found at the trend line at 1.3735,