Forex: EUR/USD Closes At 1-Week High On Buoyant Sentiment - Next Frontier?

Includes: FXE, FXY, UDN, UUP
by: FXstreet

The EUR/USD rose 1.5% on Thursday and closed the day at 1-week highs, fueled by the risk appetite tone following the ECB decision to keep its policy unchanged and Draghi's speech saying that the eurozone is in better condition than expected.

President Draghi offered no hints of future rate cuts. Even though Draghi said that inflation risks were balanced and economic risks were on the downside, comments were relatively balanced. He also said the decision to hold interest rates steady was unanimous, and noted the significant improvement in financial market conditions.

The euro and stocks were also bolstered by solid demand at a Spanish debt auction and strong Chinese data. Meanwhile, the yen is among worst performers on Thursday, and even recently, the USD/JPY jumped to its highest level since July 2010 at the 88.80 area. The surge seems to owe most, if not all, the renewed bullish flair to a Nikkei article noting that the Japanese government is also planning an agreement with the BOJ to start targeting unemployment.

Back to the euro, currently, the pair is trading at 1.3265 after touching the highest level since January 2nd at 1.3270, and consolidating movements between 1.3250 and 1.3270. In the short term, next resistance comes at 1.3300 (high January 2) followed by 1.3308 (high December 19) and then 1.3368 (high April 3). On the flip side, a breakdown of 1.3170 (MA21d) would expose 1.3120 (MA200h) and then 1.3040 (lower Bollinger).

"Trading through 1.3175 resistance, EUR/USD continues to remain bullish through the formidable 1.3300 barrier," comments analyst Richard Lee. "However, with the psychological figure being reinforced by the 1.3307 December 19th session high, it is likely that euro bulls will begin to take profits ahead of the round figure."

In a wider picture, the ANZ Research Team thinks that the EUR/USD could hit 1.400 in 2013. The bank points to the more optimistic assessment, the proactive stance from the ECB, and the resolve being shown at national levels to budgetary improvement and restructuring. The team expects "this momentum to continue and to be visible in a re-weighting of risk appetite towards the euro."

During 2013, "this should be reflected in narrower intra-regional bond spreads, firmer equity markets and a gradual appreciation in EUR/USD above 1.4000," adds ANZ.

The Day Ahead

Friday's docket will kick in with a measure of the Chinese inflation, followed by the French Current Account and Spanish Industrial Output, all preceding a key 10-year bond auction in the Italian debt markets. Across the pond, the most relevant release will be the U.S. Trade Balance ahead of the Monthly Budget Statement.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.