One of the biggest stories in the foreign exchange market last month was the European Central Bank’s crystal clear message about what they plan to do with monetary policy going forward. On March 3, ECB President Trichet said that interest rates could be increased as early as April, which would make them the first major central bank to raise interest rates this year. The Federal Reserve, on the other hand, has maintained its commitment to complete QE2 through June and has not ruled out extending stimulus further. So with the ECB moving in one direction and the Fed in another, it is no wonder that the EUR/USD has broken to the upside.
Since the beginning of the year, the EUR/USD has gradually moved higher from a low of 1.2860 to above 1.40. This move has taken the currency pair above some key resistance levels. How the EUR/USD trades at its current level is important because further gains are contingent upon the currency pair’s ability to hold above 1.40, which would put it above the 50% Fibonacci retracement of the sell-off that took the pair from its record high above 1.60 to its 2010 low of 1.1877, as well as the 200-week SMA. If the EUR/USD holds, then there is a reasonable chance for it to test its November high of 1.4280. If it fails to do so and moves back below 1.37, a recent weekly low, then watch for a deeper slide to 1.35, around the 38.2% Fibonacci retracement of the move mentioned earlier.
Kathy Lien is the director of currency research for GFT and FX360.com, and author of the "Little Book of Currency Trading" (Wiley, 2010).