The EUR/USD finished the session sharply higher, surpassing the critical resistance level near $1.3300 and closing up 57 pips at $1.3312 (highest daily close since February 19th). In what was a quiet day of economic releases from both the EU and U.S., analysts were searching for catalyst to help explain the impressive strength.
Derek Halpenny, European Head of Global Markets Research at Bank of Tokyo Mitsubishi UFJ, was pointing towards recent hawkish comments from ECB President Draghi as an initial catalyst for the sharp move higher. "The euro remains incredibly solid and has advanced further versus the dollar. ECB President Draghi did speak yesterday and stated that rates would rise once the eurozone economy improved - a statement of the obvious." In further discussing his views, Halpenny went on to comment, "We suspect that the current euro demand is probably emanating from the unwinding of long high yielding currency positions. Both the dollar and the euro were likely used as funding currencies for these positions and hence the euro is modestly out-performing the dollar." To conclude his view, Halpenny went on to say he expects the EUR/USD will start to decline once the position unwind is completed.
Kathy Lien BK Asset Management noted the sharp gains in the pair were impressive, particularly given the dovish comments from a few ECB Members. "The euro hit a fresh 3-month high against the U.S. dollar despite dovish comments from ECB officials. According to Asmussen, the central bank is prepared to purchase unlimited government bonds via Outright Monetary Transactions and will sell bonds purchased once the Monetary Transmission mechanism is unblocked. While there is no immediate need to activate OMT, the mere discussion of it suggests that European policymakers maintain a dovish bias." Lien then went on to note the lack of economic data released the previous day, but there would be a few inflation readings in the upcoming European session to focus. "German and French consumer prices are scheduled for release tomorrow and for the most part, these reports are expected to show that inflationary pressures remain low across the region," Lien concluded.
Our Chief Analyst, Val Bednarik, was looking at the 1 and 4 hour charts in order to help determine the strength of the short term technical set up. "The EUR/USD however remains limited on speculation a rate cut is quite firm on ECB table, although maintains the bullish stance according to technical readings: the hourly chart shows price firming up above 20 SMA, as indicators head north in positive territory. In the 4 hours chart technical stance is just the same, with scope now for an advance towards $1.3360 in the short term," Bednarik concluded.
From a longer term technical perspective, both trend following and momentum indicators (RSI) remain in bullish set up on the daily chart. In fact, the RSI (14) completed a bull shift last week (breaking above 60) for the first time since early February. This is often an important development and should not be overlooked. Furthermore, it should be pointed out the RSI (14) on the weekly chart is now approaching the 60 level which will likely offer firm resistance. If momentum is able to push through this level, it could lead to further accelerated buying. On a final technical note, the ADX (7) remains sharply upward sloping on the daily chart and is building value above the 50 level indicating trend strength is still building.