11:02, 21 June

Daily analysis

Rallies to Key 1.13 Level After ECB Prepared to Announce Further Stimulus


In the last few days the EURUSD has reversed at the 1.12 level and rallied back to the key 1.13 level where it has meet stiff resistance again. It was only a couple of weeks ago the EURUSD surged higher to its highest levels in three months and in doing so pushed through the resistance at the key level of 1.13 for a few days. For the most part of this year the EURUSD has traded in a range between 1.11 and 1.13 with very few excursions outside and it remains within this range.
Over the last couple of months the EURUSD has been well supported by the 1.11 level and on several occasions it appeared as if the currency pair was poised to move through this level to a two year low. In doing so, it continued to achieve lower peaks and lower troughs which is why it looked perfectly setup to threaten the recent troughs around 1.11.

Given the strong medium term down trend, the recent surge higher to the three month high is significant. Back in April, the EURUSD attempted to climb back above the key level of 1.13 and after meeting resistance there for around a week, it was thwarted and sold off reasonably strongly falling to the two year low. In early February the EURUSD was sold off after running into resistance at the other key level of 1.15, and it maintained a trading range between 1.13 and 1.15 for the most part of the last six months.

With the recent break higher, it may look to resume this trading range and in due course, make another attempt at 1.15. On numerous occasions earlier this year, the EURUSD enjoyed rock solid support from the key 1.13 level however it is currently repelling prices lower. It is interesting to note that its excursion above 1.15 earlier in the year didn’t last long as it was quickly sold down at those three month highs.

European Central Bank (ECB) President Mario Draghi has announced that the central bank could cut interest rates again or provide further asset purchases if inflation doesn’t reach its target.  President Draghi was speaking in Portugal and stated quite clearly that if the economic situation deteriorates in the coming months the ECB would announce further stimulus. “In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required,” Draghi stated.  Mr Draghi also tried to defend the ECB’s ability to act amid growing doubts on the real effect of monetary policy if a new recession were to materialize.  “The (European) Treaty requires that our actions are both necessary and proportionate to fulfil our mandate and achieve our objective, which implies that the limits we establish on our tools are specific to the contingencies we face. If the crisis has shown anything, it is that we will use all the flexibility within our mandate to fulfil our mandate - and we will do so again to answer any challenges to price stability in the future,” Draghi told the forum.