The U.S. Dollar Index (NYBOT:DXM14) is getting trounced across the board as we roll into today’s North American session trade. The broad based weakness in the greenback has driven the EUR/USD to 2-month highs above 1.3900, the GBP/USD to 5-year highs above 1.6900, and the NZD/USD to nearly 3-year highs above .8750. While we’ve touched on GBP/USD and NZD/USD already this week, we haven’t had a chance to delve into the drivers of the EUR/USD yet.
From a fundamental perspective, the most recent catalyst for euro strength was today’s Services PMI data. Though not as strong as the corresponding release out of the UK, the report was generally constructive with the final Eurozone reading coming in at 53.1 as expected. Encouragingly, the data from regional laggard Spain was surprisingly strong, coming in at 56.5 vs. expectations of 54.3 and a previous reading of 54.0. Combined with a much better-than-anticipated unemployment report earlier today, the PMI report drove Spanish 10yr bond yields down to an all-time low of just 2.96%.
From here, traders will start to look ahead to Thursday’s European Central Bank meeting, though most expect the ECB to remain on hold despite the region’s ongoing battle with deflation. Last month, ECB President Draghi explicitly mentioned a rising euro exchange rate as a factor that could prompt the bank to act, and the EUR/USD has risen 200 pips since then, but most see the psychological 1.40 level as Draghi and Company’s tipping point; as long as the EUR/USD stays below the 1.4000 level ahead of Thursday’s ECB meeting, the central bank may remain on hold for another month.
Speaking of the price action, today’s rally has driven the EUR/USD through previous resistance at the 1.3900 level, bringing the 2.5-year high at 1.3965 to within striking distance. Today’s rally confirms the breakout from a 3-month symmetrical triangle pattern, but given the likelihood of ECB action if the pair continues to rally, we’re skeptical that the measured move target all the way up at 1.4300 will be reached.
That said, the pair is currently showing a Bullish Marubozu Candle* on the daily chart, suggesting strong near-term bullish momentum. Meanwhile, the MACD is showing growing bullish momentum by trending higher above its signal line and the “0” level. Finally, the RSI indicator has broken above its corresponding triangle pattern, confirming the move in price and strengthening the bullish bias. In the short-term, a continued rally toward previous resistance at 1.3965, followed by the critical 1.4000 level is favored, though a reversal back below 1.3900 would shift the near-term bias back to neutral.
*A Marubozu candle is formed when prices open very near to one extreme of the candle and close very near the other extreme. Marubozu candles represent strong momentum in a given direction.
About the Author
Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association. You can reach Matt directly via e-mail (mweller@gaincapital.com) or on twitter (@MWellerFX).