Cable near 1.70, the euro near 1.40. Are we going to see the big levels go or will this mark a top for now?

This was my analysis back in March and for those that may not have seen it back then it may answer a lot of questions about what we are seeing in the euro price action today. It’s also a timely reminder why the ECB haven’t really got a reason to lower the currency with actions rather than words.

The rise in the currency is partly to do with the slow ongoing recovery. It’s a side effect and one that we’ve seen in the pound also. It’s natural and so even if they moved it lower it would just get soaked back up again. The other reason is that Draghi and Co are still saying we will not see deflation. If that’s really the case then they will not be changing policy to combat something they don’t see coming. And if they do it will be reactionary action not proactive action and by then the data will have driven the currency lower anyway.

We’ve seen for years how resilient the euro is and it has lost none of that teflon coat. It may tarnish now and again but I think you’ve got a long long wait to see 1.30 anytime soon, barring something really major or catastrophic.

Another point to consider is that all the worlds economies are intertwined so even a stronger US economy doesn’t necessarily mean a weaker euro. Europe could well benefit from US economic strength.

The long and short of it is that we are slowly coming out of this crisis and with rates at their lowest levels there really is only one way for them to go. We may still have a few shocks in the works but the fear has abated and we’re looking up not down. The ECB has no need to change policy. They’ll take a sustained recovery over low inflation any day of the week no matter what their mandate is as the recovery will eventually lead to inflation picking up. The question is, can the market wait?

I think 1.40 will still be a tough nut to crack. Whether you trade the tech and/or fundamentals don’t underestimate the psychological effect of big round number levels. Remember 100 in USD/JPY. 1.40 may not be as big a level as that but it will have a similar effect, all things being equal.

In the shorter term picture 1.40 marks a point on the 2012 resistance line and from there we have virtually a clear run to the Oct 2011 high at 1.4248. We still have to breach the March 2014 high at 1.3967 though.

EUR/USD daily chart 06 05 2014

EUR/USD daily chart 06 05 2014

At the moment you can count of the 55 and 100 dma’s and the August 2013 trendline for support. I’ve been buying down to 1.37 and will continue to do so all the way down to 1.33/34 if we go there. I’m going to see how we fair at 1.40 and may look to take profit on my longs on a first attempt and reload on any decent dip. We’ve been hanging around close to the level for too long and that suggests we see an attempt sooner rather than later. The one catalysts could be the ECB meeting on Thursday. If Draghi really doesn’t want to see 1.40 then he’ll have to weave some of his silver tongued magic but not even that may have a lasting affect.