The EUR/USD has taken another small leg up as traders await the ECB's monetary policy decision. Though most analysts are expecting the ECB to keep its policy unchanged, investors have been riding the EUR/USD higher in anticipation of future rate hikes. The RBA's ¼ point raise has negatively impacted the Dollar across the board. Investors are coming to reality that the exit strategies will have to come into effect sooner or later and the RBA got the ball rolling. Since the ECB has maintained a relatively hawkish stance throughout the crisis, one is led to believe that the ECB will tighten before the Fed. The ECB's resilience has allowed the EUR/USD to hold strong while the EUR/GBP climbs towards parity. However, investors should keep in mind that Australia's economy is in a different position than the EU's. Australia's commodity-dependent economy has resulted in a quick recovery, whereas the EU's heavy reliance on manufacturing and finance has been a drag. Australia's advantageous position has allowed the RBA to keep its minimum rate at an elevated level throughout the crisis and is therefore the first to act in terms of tightening liquidity. Therefore, although the RBA's decision applies some pressure on the ECB to act, we believe the ECB will sit tight until global consumption and demand for manufactured goods stabilizes. Since analysts are expecting the ECB to stand pat, any surprise decision today would be a huge near-term catalyst for the EUR/USD.
We received some more negative data from Germany today with industrial production coming in two basis points lower than analyst expectations. This tags onto the weak German PMI data printed a couple weeks back. The present weakness in Germany's economy will likely prevent the ECB from making any rash, hawkish monetary decisions today. In fact, Trichet recently mentioned the importance of a stronger Dollar, particularly since it appears Germany's manufacturing industry is being pinched by the relative strength of the Euro. The EU is finished with econ data for the week beside tomorrow's French Industrial Production number. Therefore, the EUR/USD's performance will rely upon a combination of the ECB's monetary decision and the broad-based performance of the Dollar along with gold. Earnings season will pick up was the week progresses, and stronger than expected Q3 earnings could trigger a rally in U.S. equities and send the EUR/USD beyond our 3rd tier downtrend line and September highs. Therefore are quite a few variables which could alter the EUR/USD's trend as the week closes out, so stay tuned.
Technically speaking, our 2nd and 3rd tier downtrend lines serve as immediate-term technical barriers. If the EUR/USD can climb past our 3rd tier we believe September highs will be the next to go. Such a movement could spur a nice near-term run in the EUR/USD towards the highly psychological 1.50 level. As for the downside, the currency pair's recent strength creates several technical cushions, including multiple uptrend lines along with 10/7 and 9/29 lows. The breakout in gold and the AUD/USD along with the S&P futures trading near 2009 highs create an optimistic environment for the EUR/USD and its medium-term uptrend. However, we will have to see how the ECB meeting fairs and if the EUR/USD is able to barrel through the aforementioned technical barriers.
Present Price: 1.4770
Resistances: 1.4784, 1.4800, 1.4818, 1.4840, 1.4850, 1.4867
Supports: 1.4768, 1.4756, 1.4741, 1.4721, 1.4702, 1.4671, 1.4637
Psychological: 1.50, September Highs