Forex: EUR/USD Closes Below 1.3400 After ECB Verbal Intervention

 |  Includes: FXE, UDN, UUP
by: FXstreet

"Has Draghi permanently killed the EUR rally?" BK's analyst Kathy Lien asked in a recent report on the ECB president's latest speech. Is it true? After collapsing 200 pips on Draghi's relatively dovish statement, the EUR/USD found support at 1.3370 -- the lowest since January 25th -- with the pair stabilizing around 1.3390 in consolidation mode.

The ECB kept monetary policy unchanged, but comments from Draghi sent the euro 200 pips down, an impressive corrective movement. However, looking from a wider perspective, with the 1000 pips' strengthening in the past two months, the movement seems corrective.

When asked about the recent appreciation of the shared currency and whether it could hurt recovery, the ECB chief answered that it could be an indication that confidence in the euro has begun improving, but this situation should reflect fundamentals.

"In plain English," comments Lien, "this means he's comfortable with the current level of the euro but watching it carefully to see if the rally continues and if it does, they will have to reevaluate the impact on inflation."

"The question that many currency traders now have is whether Draghi has permanently killed the EUR/USD rally," continues Lien, and her answer is "no, fundamentals remain intact." The euro appreciation was due to eurozone leaders' relative euphoria. Following a short-term impact from Draghi's speech and additional profit taking, Lien believes "losses should be limited to support around 1.3270."

In this line, the Danske Bank analyst team sees that the risk in the near term "is on the downside for EUR/USD", especially after the "ECB masters verbal intervention." In the medium term, however, Danske believes that "euro setbacks will prove temporary," and the analyst team expects "EUR/USD to gradually trend higher towards 1.40 in coming months."

What's To Come?

With the bloc currency now stabilized below the key resistance at 1.3400, the demand for the euro remains depressed as the negative effects of Draghi's comments still hover over traders.

The cross is currently at 1.3396, 0.93% down on the day, next support levels align at 1.3355 (Kijun Line) ahead of 1.3349 (low January 25) and 1.3265 (low January 23). On the upside, a break above 1.3494 (low February 6) would aim for 1.3523 (MA10d) and finally 1.3577 (high February 7).

According to the Saxo Bank team, the ECB meeting could mean highs are ahead for EUR/USD. "It's too early to call an end to the EUR/USD rally, but this ECB meeting ups the likelihood that the highs are in for the pair."

With the pair at 1.3400, this area "was important on the way up, and a break would help weaken the trend, but a close below 1.3300 would offer further destructive potential, followed by the next flatline level at 1.3170 and the rising trendline," concluded Saxo's analysts.

The Friday Ahead

Moving forward to Friday's docket, risk appetite trends would be put to the test after the Chinese trade balance and inflation figures, ahead of the German trade balance and Italian industrial production. Across the pond, the most relevant release would be the U.S. external sector figures, followed by Wholesale Inventories.

- China Trade Balance (Feb 08 01:00 GMT)
- China Exports (Feb 08 01:00 GMT)
- German Trade Balance (Feb 08 07:00 GMT)
- Canadian Unemployment Rate (Feb 08 13:30 GMT)
- U.S. Trade Balance (Feb 08 13:30 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.