Euro Rallies After ECB Decision, Could Gains Be Sustained?

Includes: FXE, SPY, UDN, UUP
by: FXstreet

The euro rose to near 1.3000 after the European Central Bank (ECB) decided to keep rates unchanged, as expected, while signs of an improving jobs market in the United States supported equities ahead of Friday's non-farm payrolls.

The ECB left its benchmark rate at 0.75%, where it has been since July. At the subsequent speech, ECB President, Mario Draghi offered little details on the Outright Monetary Transactions (OMT) program announced last month, although he said it has helped to ease market tensions. Regarding a potential Spanish bailout, Draghi said that is up to Madrid to decide if reforms taken are enough or if it would need aid.

Wall Street indexes opened higher, also underpinned by better-than-expected jobs data. The number of people who applied for unemployment benefits rose slightly to 367,000 in week ended September 23 versus 370,000 expected. Later today, investors will also be watching the release of the minutes to the FOMC meeting at 18:00GMT for details of the discussions that led to the Fed's to launch an open-ended bond-buying program, known as QE3 or QE+.

Euro rallies toward 1.3000 but Spain has the last say

As market focus remains on whether and when Spain makes an official request for aid, which would trigger intervention in bonds' secondary market by the ECB, the U.S. employment report is the next major event that could change EUR/USD near-term course.

EUR/USD has broken above the 1.2960/70 resistance area, and hit a two-week high of 1.2999 in the wake of Draghi's words. It was last at the 1.2990 zone, where it posts a 0.7% gain on the day.

Technically speaking, the pair holds a bullish tone in 1- and 4-hour charts, although as indicators reach overbought levels, we could expect a consolidation phase before resuming the upside, with 1.3100 as the next major target on the upside. However, according to the TD Securites team, a rejection from 1.3000 could see a slide to 1.2900 without much in the way.

Christopher Vecchio, analyst at DailyFX, notes that the euro could extend gains over the next week. "I believe that the efforts set forth by the Spanish government via the 2013 budget will be deemed sufficient in the coming days, paving the way for a full sovereign bailout by Spain," he explains. "This is the most significant event expected to take place over the next week or so and has the potential to be a major positive catalyst for the EURUSD and the S&P 500."

Attention turns to NFP

However, EUR/USD could face some hesitation heading into the U.S. non-farm payrolls report release. "With the ECB decision out of the way, markets will be looking ahead to tomorrow's U.S. September nonfarm payrolls report," says the Wells Fargo team. "Judging from recent U.S. data, the jobs numbers should not be particularly weak, which in our view could play into further gains in risk-sensitive commodity and emerging currencies."

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.