Forex: EUR/USD Knocks On The 1.3400 Door - What's Going On?

Includes: FXE, UDN, UUP
by: FXstreet

Following a brief rejection at 1.3375 to find support at 1.3335, the EUR/USD resumed its uptrend toward intra-day highs at 1.3585, just ahead of the 1.3400 key level. Currently, the EUR/USD is trading quietly around 1.3375, closing the day 0.65% above its opening price.

There are 3 reasons why the EUR/USD is rebounding above 1.3300, according the analyst Richard Lee: the successful Spanish debt auction, the European Central Bank's reinforcement of growth in 2013, and the German Economy Minister Philipp Rosler remaining bullish.

"Rising off of 1.3265 support, the EUR/USD has moved higher on the session and is set for another test of 1.3400 in the near term," comments Lee. "Behind the move are three key themes that are bullish for the single currency and may make the difference on whether the pair successfully breaks through the formidable barrier."

As for the short term, 1.3400 comes again as an immediate bullish target for the cross ahead of its 2012 high of 1.3485. Next resistance levels lie at 1.3487 (2012 high February 24) and then 1.3491 (50% of 2011-2012 decline). On the flip side, support levels are located at 1.3249 (low January 11) ahead of 1.3300, while the short-term pressure would increase only below the 1.3250/45 area, targeting the 1.3200 mark. The longer-term view, however, remains positive, even though daily indicators begin to lose momentum.

Are The Euro Bulls Ready To Rock?

Bank of Tokyo Mitsubishi UFJ analysts are bullish on EUR/USD´s prospects ahead, and can see spot moving between 1.3200-1.3500. With the Fed currently easing monetary policy through $85.0 billion of asset purchases per month, the ECB's contrasting on-hold stance is gradually pushing EUR/USD higher.

The bank noted in a recent report that the ECB's commitment to purchase unlimited eurozone government bonds is also proving a sufficient backstop for now to restore investor confidence, leading to an ongoing narrowing of the eurozone sovereign credit risk premium supporting the euro.

In this line, the attempt to talk down the euro by euro-group Chair Juncker will likely only help to dampen upside in the near-term without support from further ECB policy easing.

"The EUR is still on a bullish path from a technical standpoint on the daily and weekly charts, leaving us favoring higher levels regardless," says the TD Securities team. "The spike higher has put the EUR at the top of the FX performance rankings overnight, lifting both EUR/USD and EUR/JPY toward the highs set earlier this week. For EUR/USD, breaking decisively into the 1.34 handle is the next major challenge, while for EUR/JPY, 120.00/10 is the level to watch."

On the other hand, Scotiabank sees the EUR/USD closing the year at 1.27. "As EUR approaches 1.35, we would expect resistance to intensify and continue to hold a year-end target of 1.27, expecting uncertainty and significant hurdles to weigh on EUR trading later in the year," affirmed Chief Currency Strategist Camilla Sutton at Scotiabank.

The Day Ahead

Markets in the U.S. inched higher on Thursday, buoyed by the better-than-expected results in Housing Starts and the Initial Jobless Claims, which fell to a 5-year low. The U.S. Dollar Index traded into negative ground as risk appetite gained ground again, and the S&P 500 and the Dow Jones closed at 5-year highs.

Moving forward to Friday, risk trends will be put to the test, as China will release its GDP figures for the fourth quarter as well as retail sales and industrial production.

The UK will release its December Retail sales, while the eurozone docket would be almost non-existent, as only Italian industrial orders/sales are due. Across the pond, the preliminary print of the Reuters/Michigan index will be the most important event.

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.