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Euro Surges After ECB President Draghi Implies Further Action

Euro Surges After ECB President Draghi Implies Further Action

2012-07-26 10:59:00
Christopher Vecchio, CFA, Senior Strategist
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In a heavily biased market, it only takes a little bit of news of the opposite sentiment to provoke quick moves. Such has been the case in the Euro today, which has rapidly appreciated to its weekly high against the US Dollar following constructive commentary from European Central Bank President Mario Draghi today. President Draghi said that “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough. There are short term challenges, to say the least.” Seemingly, this has translated into a likely bond buying program to suppress peripheral European sovereign bond yields.

As expected, bond yields have pulled back in the two key European countries, Italy and Spain. The Italian 2-year note yield has fallen to 4.417% (-45.7-bps) while the Spanish 2-year note yield has plummeted to 5.707% (-47.3-bps). Similarly, the Italian 10-year note yield has dropped to 6.175% (-21.7-bps) while the Spanish 10-year note yield has slid to 7.097% (-18.7-bps); lower yields imply higher prices.

RELATIVE PERFORMANCE (versus USD): 10:55 GMT

NZD: +1.08%

AUD:+0.83%

CHF: +0.61%

EUR: +0.60%

GBP:+0.59%

CAD: +0.56%

JPY: -0.08%

Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): -0.55%(-0.21% past 5-days)

ECONOMIC CALENDAR

Euro_Surges_After_ECB_President_Draghi_Implies_Further_Action__body_Picture_5.png, Euro Surges After ECB President Draghi Implies Further Action

There are two key pieces of data on today’s docket, both of which have the potential to stir significant volatility. At 08:30 EDT / 12:30 GMT, USD Durable Goods Orders for June will be reported, and a slight +0.3% expansion (from +1.3%) is expected. At 10:00 EDT / 14:00 GMT, USD Pending Home Sales for June will be reported, and solid growth of +12.1% (from +15.3%) is expected.

TECHNICAL OUTLOOK

Euro_Surges_After_ECB_President_Draghi_Implies_Further_Action__body_Picture_1.png, Euro Surges After ECB President Draghi Implies Further Action

EURUSD: The EURUSD has rallied massively this morning, continuing to building off of yesterday’s Bullish Engulfing candle. After breaking the 1.2155/70 supply zone, the pair has quickly traded into the next zone of interest at 1.2220/40. A break of this zone exposes a test of 1.2310/25 above; an advance into this area should be sold. Support comes back in at 1.2220/40, 1.2200/05 (10-DMA), and 1.2110/15. We remain bearish as the pair has yet to complete its measured move from its May 1 decline, and over the coming six-weeks, we are looking for a sell-off into 1.1695-1.1875.

Euro_Surges_After_ECB_President_Draghi_Implies_Further_Action__body_Picture_3.png, Euro Surges After ECB President Draghi Implies Further Action

USDJPY: Is the USDJPY is working on an Inverted Head & Shoulders pattern off of the June 1 low? It certainly appeared so for a while there; but the daily close below 78.60 suggests that the pair could trade as low as 78.15/25 before buying interest returns. Still, as long as the Head at 77.60/70 holds, the pattern remains technically valid. With the Head at 77.60/70, this suggests a measured move towards 83.60/70 once initiated. Near-term resistance comes in at 79.05/10 (200-DMA). Price action to remain range bound as long as advances are capped by 80.60/70. Watch the 5-DMA (78.35) for advances; the USDJPY hasn’t closed above the 5-DMA since July 11.

Euro_Surges_After_ECB_President_Draghi_Implies_Further_Action__body_Picture_4.png, Euro Surges After ECB President Draghi Implies Further Action

GBPUSD: Another Doji after the downtrend to start the week has yielded a reversal today. The pair is currently testing 1.5590, trendline resistance within the descending channel that the GBPUSD has respected for much of the past six-weeks. A break above exposes 1.5645 then 1.5670. Near-term support comes in at 1.5460/70 (weekly low) then 1.5390/1.5405 (monthly low).

Euro_Surges_After_ECB_President_Draghi_Implies_Further_Action__body_Picture_2.png, Euro Surges After ECB President Draghi Implies Further Action

AUDUSD: As noted yesterday, a close above 1.0275/85 (10-DMA, 200-DMA) should have yielded a move towards 1.0500; and today, it’s evident that the ascending channel that’s been in place for the past six-weeks continues to be respected. At current price (1.0380), near-term resistance comes in at 1.0440 and 1.0480/95; we will look to sell rallies into these levels. Near-term support comes in at 1.0310/30, 1.0245/65, 1.0210/15, then 1.0170/90.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com

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