Euro eyeing year highs in earnest

EUR/USD rallied to a high of 1.3607 in European and US trade after Italian prime minister Enrico Letta survived a confidence vote.

- Technicals support buying on dips

- ECB gives traders a reason to support the EUR

- US fiscal woes continue

The ECB press conference proved to be a less dovish affair than the market was positioned for. It is clearly positive that the Italian government has survived the confidence vote and many EUR bulls will be pleased a number of unfriendly-market scenarios have been avoided. Buying was subsequently seen in the Italian ten-year treasury (yields fell five basis points), which highlights the positive mood given Spanish bonds saw sellers. Certainly the vote now removes a number of short-term risks, although a few political commentators have argued that the medium-term stability is not guaranteed.

The ECB meeting went widely as expected, however shortly after Mario Draghi caused a big spike in EURs across the G10 space in his subsequent press conference. Judging by the fact EUR/USD rallied around 90 pips to 1.3607, the market was expecting much more dovish rhetoric, even laying the foundations for a fresh round of cheap loans like we saw in 2011 and 2012 (LTROs) this year.

What we got was a central bank that showed little concern about the low levels of inflation and while the ECB president detailed the European recovery was ‘weak, fragile and uneven and from low levels’, the market heard little new information around extraordinary measures. If anything, it seems the ECB seems quite comfortable with inflation (it’s one mandate) and feel things are generally going as planned. There was little concern with EUR/USD sitting not far off the year’s highs of 1.3711.

The issue I have now is around the overbought nature of the pair, although it has to be said similar readings can be seen on GBP/USD as well. With daily stochastics at levels where we have seen pullbacks before we feel a pullback could be on the cards. However, with the daily MACD firmly above zero and trending higher, this suggests pullbacks should be contained within the bullish trend.

Technically there hasn’t been a set-up which suggests a strong reversal is on the cards, however my medium-term preference would be to buy dips down the 38.2% retracement of the September to October rally at 1.3415, although the risk is it doesn’t trade the low anytime soon, as this would be a fairly aggressive pullback. A lot now rides with the US, and EUR/USD should continue to trend higher if we don’t see some more positive signs around a debt ceiling agreement.


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