Today’s ECB press conference featuring President Draghi disappointed all the euro shorts as the EUR/USD pair traded higher by 80 pips. Draghi maintained the low interest rate policy; however, the market expected announcement of SMP sterilization in order to incite inflation. This did not occur, and with the recent pull out of Russian forces within Crimea region, all markets have been in “risk-on” mode with the dollar index slipping below the 80 level.
Euro Update and Outlook
The recent events in Ukraine and the Crimea region had brought instability to the markets, mostly affecting the Russian markets with the equity index losing an astounding 10% of value in one day, most since the 2008 crisis. The dollar and the yen acted as safe havens and many thought the risk-off would last longer than one to two days; with Russia pulling troops out of the Crimea region and with the recent news from Crimea Parliament voting to become part of Russia, it’s uncertain how events will unfold as the US and EU have threatened Russia with sanctions, surely to go unnoticed by President Putin. At this time, I expect the euro being affected by geopolitics only if actions are escalated by both sides. With the pair trading above 1.3830 at this time, it looks poised to close above the 1.3800 figure and may reach December 27th high of 1.3893.
Last few times I wrote about this currency pair, I kept mentioning the importance of closing above 1.3800. While this is important as it will be the break of important resistance, there is another important level of 1.3900, which marks the downward sloping trend-line from 2008 high of 1.60 to the high of 2011 just under the 1.50 level and the 62% retracement of the leg lower from 2011 high to 2012 low. Coincidently, the dollar index has reached an important low with the upward sloping trend-line from 2011 low of 72.67 to 2013 low of 78.71 with current support at 79.70. If the market holds current momentum, it looks clear to break both of these levels.
A failure to move higher could pressure euro bulls and lead to profit taking ahead of Friday’s data. Expect range trading between 1.3820-1.3860 until then.
With the release of employment data less than 24 hours away, we must continue to see how the markets react to the data. I expect a better than expected figure to support the USD as it will give traders more reasons to think the Fed will continue on its quest to taper the QE purchases. If the figures are released worse than expected, many will think that a pause in tapering will occur for the Fed to analyze more data ahead of altering policy.
Short term resistance – 1.3900
Short term support – 1.3750-1.3800
Looking for momentum to pick up on a break of 1.3900-1.4000