Is EURUSD Sustainable At 1.40?

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During today’s ECB Press Conference, President Mario Draghi was a bit more optimistic than market had expected, and as a result, EURUSD jumped over 100 pips and is now (11:00am EST) trading at the year-to-date highs of 1.3845; one question that comes to mind for us Forex traders, is that: Is the EURUSD sustainable at the current level and will it go to the 1.40?

Well, to answer that question, we have to first look at what’s being said today, and here are some of the highlights by Draghi today:

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  • ECB’s baseline outlook was more or less confirmed by data, which drove today’s decisions; news since last policy meeting has been positive
  • Unemployment has stopped rising, has stabilized. Gap between Germany and distressed eurozone nations is narrowing. Money markets are normalizing.
  • Euro exchange rate is important for growth and inflation, but ECB has no FX policy target.
  • Reiterates OMT program is ready to be used when needed. OMT falls within ECB’s mandate.
  • Forex developments muted inflation by 0.4-0.5% since 2012. Rule of thumb says 10% change in exchange rate effects inflation by 0.4-0.5%.
  • Not seeing any contagion from Ukraine situation now, but geopolitical risks from Ukraine could become substantial.
  • Our analysis disagrees with IMF analysis which calls for more ECB policy stimulus.

It’s obvious to see why the Euro gained after these comments today, but more importantly, today’s ECB Staff Projection also painted a rosy picture:

(EU) ECB UPDATES STAFF PROJECTIONS: 

  • Raises 2014 GDP outlook from +1.1% to +1.2%
  • Maintains 2015 GDP outlook at +1.5%
  • Guides initial 2016 GDP at +1.8%
  • Lowers 2014 inflation forecast from 1.1% to 1.0% 
  • Maintains 2015 inflation at 1.3%
  • Guides initial 2016 inflation at 1.5%
  • Guides initial Q4 2016 inflation at 1.7%

Again, with inflation back to the 1.7% by the end of 2016, based on current monetary policy (without negative deposit rates or cutting rates to 0.10%), it is agreeable that there is no immediate pressure to deflation, thus removes the possibility of future rate cuts, and in essence a boost for the EUR.  When you combine that with the positive tone today, it’s no wonder why the EURUSD gained 100+ pips.

But before you leverage everything on the Euro, I like to suggest putting today’s report in perspective.  Ultimately for the year of 2014, ECB is expecting about 1.0% GDP and 1.0% CPI, which is still represent quite a risk for the Euro, especially with what’s going on in Ukraine and the potential bailout number three for Greece and bailout number two for Cyprus.  Euro Zone economic recovery is struggling, and it’s just uncertain to expect that EURUSD will be sustainable at the current level.

Furthermore, US Fed official Dudley stated that “…Fed and market thinking on a first rate hike in mid 2015 are aligned.” not only echoed market sentiment, but also provided another confirmation to Fed’s policy set forth by Bernanke during last December.  To take this a step further, looking back again at the ECB Staff Projections, ECB might hike interest rate sometime in 2017, versus almost certain rate hikes by the Federal Reserve in 2015, or less than a year from now, where do you think EURUSD will be in 12 months?

In conclusion, I am inclined to take advantage of any EURUSD rally and sell into it.  With tomorrow’s NFP likely to disappoint, perhaps the ideal timing would be a SELL on Monday the 10th.

Thanks,

henry-sig

 

 

 

 

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About Henry Liu

My name is Henry Liu and I am a Forex Trader and Mentor. I help traders achieve consistent income trading Forex while spending less time trading. My focus in trading is a combination of Fundamental Analysis, Technical Analysis, and Market Sentiment. Far too many retail Forex traders concentrate on just one aspect of trading, technical analysis, and ignore everything else; it is my goal (and vision) to educate every trader on how to take advantage of news trading and become more balanced traders.

You can find more information about me on my Google Profile.

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