Euro Mulling Its Next Move Higher

Includes: FXE
by: FXstreet

The single currency is extending the recent congestion pattern, boxed in between 1.3250 and 1.3400, basically due to the lack of any fresh catalyst to break that pattern in either way.

… Bulls would be favoured

Since the last ECB gathering, and President Mario Draghi's bullish performance, EUR/USD has well managed to remain underpinned around key resistance at 1.3300, waiting for anything that can define a more solid trend. The news on the U.S. fiscal front proved to be less of a driver for the euro price action, as the uncertain panorama that stems from it seems to still be far away from euro traders. In addition, mixed data out of the euro bloc key, namely manufacturing and services PMIs just passed, vaguely affecting the cross, which rapidly returned to its new comfort zone around 1.3320/30

What else is on the cards? Now let's leave politics aside and concentrate on the real economy, and EU financial area specifically. When the banking sector took advantage of the two 3-year LTROs, they committed to, when and if possible, returning excess liquidity to the ECB. The early-repayment schedule will kick in tomorrow, and this could well be viewed as the kick-off of another leg up in the cross. Therefore, from Friday onwards, the European monetary authority will communicate how much liquidity will be returned on a weekly basis, after the first transaction is due on Wednesday 30th.

The probable outcome can be separated in three different scenarios: a large amount of repayment funds in the very first weeks would have a direct impact in the money market, rising its yields; on the contrary, a small amount would signal that the EU banking sector is still struggling to overcome the crisis. Therefore, the better scenario would be a gradual early repayment, so that investors would realize that the banking sector's dependence from the ECB is gradually fading away, along with the sector slowly returning to normality. Consequentially, this would aide the restoration of a key factor to support further upside attempts to conquer previous tops around 1.3480 and 1.3560: investors' confidence.

The in-house Bullish Percentage Index (BPI) is also echoing the current congestion pattern and generalized strength in the shared currency, pointing that 68.42% of euro-based pairs are still on bullish mode, according to point and figure patterns.

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.