Thursday’s European Central Bank monetary policy announcement is the most important event risk this week. The euro is trading strongly ahead of the rate decision despite the risk of ECB President Draghi Jawboning the currency. Since their last meeting in December, EUR/USD is up close to 5% and while a number of ECB officials have come out speaking against the currency’s rise, investors are waiting on Draghi. The problem is that we’re not sure he’ll say enough to halt the currency’s gains.
It’s important to realize that the euro is rising under the backdrop of a weaker dollar, hope for early guidance change a and stronger Eurozone growth. In order for traders to stop buying euros and start selling, Draghi needs to unambiguously dovish. That means expressing currency concerns and downplaying the chance of a guidance change. He can accomplish that by saying rate hikes won’t come until after QE ends and that the market misinterpreted the ECB minutes.
In this case, EUR/USD will fall with profit taking possibly driving the pair below 1.23. However if Draghi expresses concerns about the currency but focuses on the improvements in the economy and acknowledges the possibility of early guidance changes, buyers will sweep in quickly especially following knee-jerk decline and we may find EUR/USD on its way towards 1.25 because the trend is on the side of the currency.
Technically, there are 2 key resistance levels about the current one, the 200-day SMA near 1.2430 and then 1.25.