The ECB Eases, Euro Rallies to Two-Week Highs
I suspect many traders got caught off guard on the reaction in EUR/USD on the back of Thursday’s European Central Bank meeting.
The ECB eased policy which was largely expected, but EUR/USD abruptly changed course after coming within a narrow distance of breaking to a multi-year low.
There are a few different narratives for what may have caused the reversal. Perhaps it was the markets not seeing any further easing potential, essentially viewing the central bank as ‘tapped out’.
This view is supported by ECB President Draghi’s call for fiscal stimulus to complement monetary policy. Draghi has long advocated for fiscal measures but the backdrop seems a bit different this time. After all, inflation continues to run below targets after five years of loose policy.
I think there is still a lot of uncertainty around the catalyst for the EUR/USD rally yesterday. However, there are some clear technical signals in play. Further, positioning and sentiment cannot be ignored at this stage.
It seems likely that several traders got caught on the wrong side of the trade yesterday. For this reason, I expect that EUR/USD declines will continue to be short-lived as sellers cover.
From a technical standpoint, there is a down trendline in play that originates from a high posted in late June. So far, in the early day, sellers have managed to defend the trendline.
Ahead of the meeting, there were several resistance areas that capped rallies in EUR/USD. Essentially, there was a confluence near 1.1060 that included the 20-day moving average and the 100 moving average on a 4-hour chart.
That confluence area has broken to set a bullish tone. The hurdle now is the downtrend line which carries confluence with the 200 moving average on a 4-hour chart.
The 1.1060 area continues to be significant on a daily close basis. If sellers manage to drive the pair below it and keep it there by the end of the day, it might trigger a further decline.
Considering the recent upward momentum, the pair carries a bullish bias. Although the above-mentioned hurdle, in around 1.1100, remains in focus.
- EUR/USD reversed abruptly on Thursday and the upward momentum suggests the potential for further upside.
- The pair is held by a confluence of resistance from an 11-week down trendline and the 200 MA on a 4-hour chart.
This article was originally posted on FX Empire
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