In a move that should have been bullish for the Euro today, the ECB drained liquidity from the money markets. Economic data was also firm with August industrial production quadrupling expectations while ECB member Stark continued to be optimistic about growth.
Yet the Euro did not rally, leading many traders to wonder whether the EUR/USD will see 1.40 before 1.4350. Taking a step back, the monetary policy bias of the ECB and Federal Reserve are clear. One central bank remains staunchly hawkish and refuses to talk down its currency while the other is trying to time its next rate cut and is basking in the benefits of a weak currency. In the long term, this dynamic should be positive enough for the EUR/USD that we should see the currency pair hit fresh record highs. However in the week to come, there is a lot standing in the way of further Euro strength. From the US, we have CPI and the G7, both of which have a greater chance of being dollar positive than negative. Over in the Eurozone, we are expecting the German ZEW survey of analyst sentiment along with consumer prices for the Eurozone and producer prices for Germany, all which could skew to the downside. As a result, we could see a more Euro weakness before continued strength.
Written by Kathy Lien, Chief Currency Strategist for DailyFX.com