The euro skyrocketed yesterday, following some optimistic comments from the ECB chief Mario Draghi. He noted that deflationary forces in the euro area have been replaced by reflationary ones, and that the factors weighing on the path of inflation are mainly temporary factors that typically the Bank can look through. He added that signs now point to a strengthening and broadening recovery in the euro area, while the bloc’s economic growth is above trend.
Even though none of these signals is particularly new, his hawkish tone may have come as a surprise to investors who expected yet another cautious speech, following the one on Monday. What’s more, these remarks are in line with our view that the ECB is likely to continue to shift towards a more sanguine tone at its upcoming gatherings. Indeed, the Bank has removed some dovish aspects from its forward guidance in both the March and the June meetings. Assuming that Eurozone’s economic data remain solid, we could see this process continue at the September meeting, or even earlier, perhaps in July. Something like that could keep the euro under buying interest. Having said that, much of the currency’s near-term direction may also depend on the bloc’s preliminary CPI prints for June, due out Friday.
EUR/USD surged on Tuesday following ECB President Draghi’s remarks. The pair emerged above 1.1220 (S2) on the comments and later in the day, it managed to overcome the key resistance (now turned into support) hurdle of 1.1300 (S1). In our view, the break above 1.1300 (S1) signals the upside exit of the sideways range that contained the price action since the 19th of May, between that barrier and the support zone of 1.1120. As such, we consider the short-term outlook to have turned back positive. We expect the bulls to challenge the 1.1370 (R1) resistance soon, where a decisive break could set the stage for more upside extensions, perhaps towards our next resistance of 1.1430 (R2). Nevertheless, given that the rally appears overextended, we would stay mindful that a corrective setback may be on the cards, perhaps to test the 1.1300 (S1) obstacle as a support this time.
EUR/GBP also rallied on Draghi’s speech. The pair emerged above the 0.8820 (S1) hurdle and during the early European morning appears ready to challenge the 0.8870 (R1) resistance, marked by the peak of the 12th of June. Bearing in mind that the rate continues to trade above the uptrend line drawn from the low of the 10th of May, we consider the short-term outlook to be positive. A decisive move above 0.8870 (R1) would confirm a forthcoming higher high and perhaps open the way for our next resistance of 0.8945 (R2).
Today’s highlights:
The only economic indicators we get are the UK’s nationwide house price index for June, and later in the day, US pending home sales for May.
The absence of major economic indicators does not imply a quiet day though, as we have a plethora of speakers on the agenda. The main event will probably be a panel discussion at the ECB forum on Central Banking, featuring ECB President Mario Draghi, BoE Governor Mark Carney, BoJ Governor Haruhiko Kuroda and BoC Governor Stephen Poloz. Even though the discussion may be academic overall and thus may not have a significant market impact, we will still listen closely, considering the importance of all these speakers. ECB Vice President Vitor Constancio, as well as Executive Board members Sabine Lautenschlager and Yves Mersch, will also deliver remarks.
EUR/USD
Support: 1.1300 (S1), 1.1220 (S2), 1.1170 (S3)
Resistance: 1.1370 (R1), 1.1430 (R2), 1.1485 (R3)
EUR/GBP
Support: 0.8820 (S1), 0.8775 (S2), 0.8715 (S3)
Resistance: 0.8870 (R1), 0.8945 (R2), 0.9000 (R3)
