Forex: Bulls Slam Bears And Put The EUR/USD At 1.3700

Includes: FXE, UDN, UUP
by: FXstreet

Following a short-lived dip to the 1.3585 zone, the EUR/USD bounced fiercely and managed to break above the 1.3675 area to hit a fresh 14-month high of 1.3710. Bulls retook the control on the pair and currently, the EUR/USD is closing at 1.3640, just in consolidation mode.

As for the short term, the cross is up 0.50% at 1.3640. Next resistance could be 1.3710, 1.3815 (high November 14) and 1.3833 (61.8% of 2011-2012 decline). On the flip side, support levels lie at 1.3585, 1.3574 (hourly low February 1) and then 1.3542 (low January 31).

Early in the session, EUR/USD enjoyed a risk appetite environment from U.S. employment report, ISM and PMI manufacturing data, and Michigan consumer sentiment. NFP came in at 157K in January, against 160K consensus. The Unemployment Rate was reported at 7.9%, against estimates calling for 7.8%. U.S. manufacturing PMI rose from 54.0 to 55.8 in January. ISM manufacturing PMI jumped to 53.1 with good secondary components. And the Michigan consumer confidence advanced unexpectedly to 73.8 from 72.9.

But BK's analyst Kathy Lien recommends being aware of profit taking ahead of the ECB. In the middle term, "there is a potential for some profit taking in the EUR/USD ahead of next week's ECB meeting. Monetary policy is expected to remain unchanged but everyone will be listening carefully for Draghi's comments on the currency," points out Lien.

In this line, Lien adds that at 1.34, "the ECB was comfortable with the level of the euro but do they feel the same way after the currency hit a high of 1.37? We believe that the central bank is getting fidgety but the pain threshold for the ECB should be between 1.38 and 1.40." So pay attention to eurozone leaders' comments on overvalued euro as Juncker has said in the past.

Nevertheless, The Brokers, Banks and Independents forecast on EUR/USD doesn't expect too much bullish extension, as the poll sees 1.3695 as the 1-week target, and a downtrend to 1.3400 is in the 3-month windows.

Where Is The Next Frontier?

In a previous article, we noted that the same people who called 1.30, 1.32, 1.33, 1.34, 1.35 and 1.36 as "big barriers" now say the same thing about the $1.37/38 area. Goldman Sachs revised its forecast from 1.25 to 1.40 for the coming months, and the UBS bank targeted 1.37 as a 1-month goal. To top it off, the BNP Paribas team has joined this group and increased its EUR/USD forecast.

BNP has revised its end-Q1 forecast to 1.38 and the Q2 forecast to 1.40 on the back of improvement in the eurozone data, the shrinkage of the ECB's balance sheet and the diversification demand from the EM reserve managers. "FX moves will become less EUR-centric going forward, so that there is scope for a catch-up in the recent laggards such as the GBP and the commodity currencies such as NZD, and to smaller extent, the AUD given the caution ahead of next week's RBA meeting."

But on the other side, Rabobank thinks that the EUR/USD could fall markedly to 1.30 in 3-6 months. In the opinion of Senior FX Strategist Jane Foley at Rabobank, since the 2012 lows around 1.2040 posted in July, the euro was constantly pushed higher either by the ECB and Draghi's optimistic comments, further QE by the Fed, or cheap liquidity, all echoing better investor confidence.

However, the bank has been arguing for a while that "there is a disconnect between the strength of investor confidence and the vulnerability of the global economic climate." Foley points out that the eurozone is in the middle of a recession, and the bloc may not grow at all this year.

"Although it is currently difficult to specify both the trigger and the exact timing for a correction lower in EUR/USD, we anticipate on a 3-6 mth view EUR/USD could fall sharply back towards the 1.30 area before resuming the current uptrend," Foley concluded.

The Week Ahead:

With a very light docket on Monday, it's unlike to spark any selling interest in the euro, as the Spanish Unemployment Change is due (+150.0K exp.), followed by the Sentex index (-3.6 exp.) and the Producer Prices (+2.2% YoY exp.).

For the whole week, investors should pay attention to the following events:

- ECB Interest Rate Decision (Feb 07 12:45 GMT)
- BoE Interest Rate Decision (Feb 07 12:00 GMT)
- RBA Interest Rate Decision (Feb 05 03:30 GMT)
- Eurozone December Retail Sales (Feb 05 10:30 GMT)
- Chinese January Exports (Feb 08 01:00 GMT)

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.