Now it’s all about the difference in the monetary policy between the euro area and the United States. This difference makes EUR/USD decline to the new minimums.
While German business sentiment fell to its lowest level in nearly 1-1/2 years, US new home sales surged to the highest level in more than 6 years. The yield premium US Treasuries offer over German bunds approached 15-year highs. It means that the US is more attractive for the international capital flows than the euro area, and so is the USD in comparison with the EUR.
EUR/USD slid below $1.2790 – 61.8% retracement of the 2012-2014 advance – and tested the psychological level of $1.2700 which also happened to be a 24-month minimum. The next support is at $1.2660 (Nov. 2012 low) and $1.2600 (bottom of the current downtrend channel). The level of $1.2500 (76.4% Fibonacci retracement) looks like a logical target for the pair. Resistance is at $1.2830 and $1.2920.
Next week all attention will be focused on the ECB meeting and press conference on Thursday. The central bank will reveal the details of its ABS purchase program. Before that, on Tuesday, there will be a release of the euro zone’s flash inflation data. Recent soft economic figures in Europe suggest that the ECB needs to be more aggressive in its actions.
Bearish expectations will keep building ahead of the meeting. Although the pair’s surely oversold, its attempts to correct higher have so far been weak. All will depend on the ECB: the central bank has to sound really dovish in order not to disappoint the market. Our base scenario is that this time the ECB won’t disappoint us. Note, however, that the short positions on euro are huge. If the ECB doesn’t make big steps and big statements next week, there will be a short squeeze up.
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