Forex: Green light for the EUR/USD; Ready for 1.40?

FXstreet.com (San Francisco) - The Europhoria is back! The euro finally broke its range against the dollar to the upside, surging to fresh 11-month highs at 1.3480 propelled by Bank's LTRO repayment. It was an unforgettable week for the single currency, now closing quiet around 1.3450.

The EUR/USD's upside was fueled since early morning, after the better-than-expected IFO results and later by news that 278 eurozone banks would repay to the European Central Bank a total of €137 billion of the initial 3yr LTRO loan next week.

Stocks rose in Europe and the US as ECB news and strong earnings reports offset weaker-than-expected US housing data. The US stocks market closed Friday and the whole week with gains on the back of strong earnings season. The S&P 500 logged its longest winning streak since 2004. Apple collapsed 12% on the week and Netflix rockets 70%.

Back to currencies and taking the short term, EUR/USD's next resistance lies at 1.3487 (2012 high Feb.24) followed by 1.3491 (50% of 2011-12 decline) and then the psychological level at 1.3500 On the downside, a dip below 1.3410 (hourly low Jan.25) would aim for 1.3349 (low Jan.25) and then 1.3347 (MA10d).

According to BK's analyst Kathy Lien, there are 3 drivers behind the EUR/USD breakout, the Strong German IFO, the European banks make big LTRO repayments and the U.S. stocks up with new home sales plunge. After clearing its 1.34 resistance, "the next area of contention will be between 1.3485 and 1.3525, where last year's high, the 200-week SMA and 50% Fibonacci retracement of the 2011 to 2012 sell-off converge," affirms Lien.

"This will be a very important level especially since 1.35 is a big round number," Lien adds while she expects the EUR/USD "to sustain its technical break and aim for 1.35."

But the FXstreet.com's experts, brokers and banks forecast seem to say "not too fast" as the long-term views for the euro don't share the positive bias of recent highs. The 3−month view is below 1.3300 in the poll.

Are We Ready For 1.3500? Scope To 1.40

Now with the 1.3400 psychological figure cleared, the EURUSD has room to advance on the next viable resistance barrier at 1.3490. "The figure should lend some credence for a short term pullback," points FXstreet.com analyst Richard Lee. "With medium term targets being eyed at 1.3546."

EUR/USD pushed higher, turning the short-term outlook decisively bullish, and printed a fresh 11-month high of 1.3478, just shy of its 2012 high and immediate target at 1.3485. The positive bias will likely persist as long as the pair holds above the 1.3400 psychological level, while loss of the 1.3360 zone, could confine the pair to a new consolidation phase.

In the bullish side, the Economics Research Team at Goldman Sachs has changed its EUR/USD forecast to "1.4000 flat over the next 3 and 6 months, from 1.2500 and 1.3300 previously -- spot has pushed through our previous forecasts as the euro area risk premium was unwound, and we expect this to continue."

"Several benchmarking exercises suggest a move to EUR/USD 1.40 is likely, but we would assume that euro area and ECB policymakers would respond to currency appreciation beyond that level," Goldman Sachs team comments.

In this line, with the EUR/USD is rising towards the high end of the 1.30-1.35 short-term range. "A break higher seems plausible currently", UBS team says. "Markets were quite pleased with a strong Ifo index and also with the announced LTRO repayments to the ECB. The 137 bn EUR were slightly above market expectations and led to a rally of Italian bond yields".

Nevertheless, according to UBS, the figure was not yet large enough to signal that the financial crisis is over. "We therefore remain cautious when EURUSD rallies above 1.35".

The week ahead

Moving forward to Monday’s docket, second tier results in the euro zone – M3 Money Supply and Private loans – would drive investors’ attention to the US Durable Goods Orders and Pending Home Sales.

Later on the week, FOMC interest rate and Nonfarm payrolls will catch the attention. Check the five most important events for the coming week:

1. Fed Interest Rate Decision (Jan 30 19:15 GMT)
2. US Nonfarm Payrolls (Feb 01 13:30 GMT)
3. US Gross Domestic Product Annualized (Jan 30 13:30 GMT )
4. US Consumer Confidence (Jan 29 15:00 GMT)
5. German Consumer Price Index (Jan 31 13:00 GMT)

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