EUR/USD Rejected at Stiff Resistance Zone After ECB

EUR/USD Rejected at Stiff Resistance Zone After ECB

ECB rate decision and Draghi’s press conference was a dud as expected. EUR/USD was on the rise ahead of the rate decision and extended gains to near 1.14 levels during Draghi’s presser.

Decoding Draghi is very simple since there is nothing to decode as Mr. President was on a self congratulatory mode, stating that theirs is the only monetary policy in last four years that has supported growth. Draghi reiterated the same old message again –

• Exchange rate is not a policy target
• ECB is ready to do more if required
• QE purchases will run till March 2017 and may be extended further if required
• Interest rates to stay at current level or low for an extended period of time
• Low oil prices support domestic demand
• Correlation between inflation expectations and Oil price has decreased

Nothing new or groundbreaking came through as all of the above points are well known to the markets. The last comments is somewhat encouraging for the EUR bulls as it would mean sell-off in oil would have less impact on inflation expectation.

Market reaction

German yield curve steepens – Long duration bund yields are up anywhere between 6 to 8 basis points. Yields were on the rise heading into the ECB as the central bank was not expected to announce fresh stimulus measures. Short duration yields are lagging far behind long duration yields.
EUR rejected at 1.14 – EUR/USD clocked a high of 1.1398 as anticipated by us before falling back to 1.13 levels. EUR/GBP had found support at 50-DMA ahead of the ECB release and jumped to 0.7898 before trimming gains slightly to 0.7885 levels.

What’s next for EUR/USD?

The focus now shifts to next week’s Fed. Markets are not even considering a slight possibility of a rate hike next week. Probability of a June rate hike is thin as well. Post June, US election would take center stage, hence markets believe Fed is unlikely to move between June and Nov. So markets are betting on a rate rise in December.
However, there is always some amount of caution ahead of the FOMC rate decision and that could see a rise in demand for the USD. Plus, correction in Oil and renewed Yen buying could also pull EUR/USD lower (via fall in EUR/JPY).

Moreover, the pair faces a stiff resistance in the zone of 1.1436-1.1534 as can be seen on the monthly chart below.

EUR/USD monthly Chart

• Bulls need a convincing daily/weekly close above 1.1534, in which case next stop could be at 1.1714 (Aug 2015 high) levels.

• Heading into the Fed meeting, bulls need to be cautious each time the pair is above 1.14 levels.

• A convincing break above 1.1534 may happen if the next week’s Fed statement kills whatever little rate hike bets exist in the markets.

• On the downside, a break below 1.1250 (preferably on daily closing basis) would indicate the down move from 1.1465 (April 12 high) has resumed. In such a case, support at 1.1144 stands exposed.