Forex: EUR/USD closes around 1.3400 after ECB verbal intervention

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

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

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 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 eurozone leaders relatively euphoria and 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, Danske Bank analyst team sees that the risk in the near term "is on the downside for EUR/USD" specially 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 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 Jan.25) and 1.3265 (low Jan.23). On the upside, a break above 1.3494 (low Feb.6) would aim for 1.3523 (MA10d) and finally 1.3577 (high Feb.7).

According to the Saxo Bank team, ECB meeting could mean highs are in for EURUSD. "It’s too early to call an end to the EURUSD 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 US 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)
- US Trade Balance (Feb 08 13:30 GMT)