09:42, 18 July

Daily Analysis

In the last two days the EURUSD has bounced off the key support level of 1.12 again after rallying and trying to push through the other key level of 1.13. In the last few weeks the EURUSD reversed and fell strongly back to the key 1.13 level and drifted a little lower testing the support at 1.12. It had enjoyed a solid surge higher from support at 1.12 back to the 1.13 level before breaking higher and reaching a three month low just above 1.14. 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 after its recent decline, it remains within this range.
Over the last few 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, although more recently the 1.12 level has provided support.

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.

In an annual report last week, the International Monetary Fund (IMF) backed the European Central Bank’s (ECB) plans for fresh stimulus as the euro zone economy faces rising risks stemming from Italy, Brexit and trade tensions.  The IMF said the central bank’s plans to keep monetary policy accommodative were “vital” as the currency bloc faces “a prolonged period of anaemic growth and inflation”.  In another blow for the EZ’s recovery, the IMF predicted inflation to remain a long way off the ECB’s 2% target at least until 2022, and forecast a 1.3% rate this year, in line with ECB estimates.  “The undershooting of the inflation objective calls for prolonged monetary accommodation,” the Fund said, welcoming the central bank’s plans to maintain its easy-money policy.  The report also said the euro remained slightly undervalued despite having appreciated last year.  If inflation expectations worsen, the IMF said that more accommodation may be necessary, and could include a new asset purchase program.