The euro is trading firmer versus the dollar after a volatile session, which saw EUR/USD bottom at 1.3460 and bounce back to near 1.3600 amid unconfirmed rumors and media reports suggesting the shared currency isn't strong enough to trigger ECB action.
Despite intraday volatility, EUR/USD managed to recover from yesterday's sell-off as it found strong support at the 1.3460 zone (23.6% retracement of the 1.2660/1.371 rally). Meanwhile, the pound continues to suffer, having lost the 1.5700 psychological level, while USD/JPY resumed the upside and touched a fresh high of 93.50 today. Stocks are also recovering from yesterday's move, with European and U.S. markets broadly up.
However, investors seem cautious of taking large long EUR/USD positions before the ECB monetary decision on Thursday, as there is growing speculation that ECB President Mario Draghi might talk down the euro given recent strength.
Euro Bounces From Key Support
A correction seems only natural. The euro had climbed over 700 pips within the last month, extending its broader bullish bias to a 14-month high of 1.3710 late last week. It can't go up forever, and the current setback is seen only as corrective. The fact that the 1.3460 area held up supports the view.
EUR/USD resumed the upside after daily indicators eased from overbought levels, and it is trading back at the upper 1.35 region. A regaining of the 1.3600/40 area is needed to refocus 1.3710. On the other hand, loss of the 1.3460 key support would expose the 1.3400/15 region ahead of 1.3300.
"Although FX markets have started the week on a slightly uncertain note, the broader financial market backdrop remains relatively calm and generally favorable," says Nick Bennenbroek, Head of Currency Strategy at Wells Fargo Bank. "For the near term, we continue to lean towards gains in most foreign currencies and further weakness in the Japanese yen."
However, many analysts are expecting the consolidation period to extend ahead of the ECB meeting. "EUR/USD briefly dipped below support at 1.3480, but has promptly bounced back," says the TD Securities team. "We may see more range-trading ahead of the ECB on Thursday."
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.