The euro was the top performer among the majors in European trading today, posting a bulk of the day’s gains during the ECB press conference. EUR/USD has regained the 1.2000 handle and is on track to post a fourth consecutive day of gains.
The ECB expressed growing concerns regarding the exchange rate and expects that the appreciation seen in the single currency will impact inflation, causing the Bank to revise down inflation forecasts for 2018 from 1.3% to 1.2% and from 1.6% in 2019 to 1.5%. Policymakers remained optimistic on growth prospects and upgraded some of its forecasts while predicting unemployment will decline at a more rapid pace.
A decision regarding a potential QE tapering was deferred to the October meeting as Draghi stated a decision will probably be made at that time although a lack of communication today combined with the persistent appreciation of the exchange rate suggests the ECB may look to taper at a smaller size than previously expected.
The initial reaction in the exchange rate as the press conference started was volatile as EUR/USD spiked sharply higher then lower before commencing in a steady rally. The pair peaked at 1.2059 and corrected lower to erase a bulk of the gain inspired by the meeting prior to once again catching a bid.
Resistance at 1.2042 marks the 2010 low and capped gains today on a 4-hour chart. The level remains important resistance to the upside especially as volatility is seen starting to slow. Slightly above the level, further resistance is seen from the August high of 1.2070. The next major upside target falls at 1.2200 as the level was previously respected on a monthly chart.
To the downside, the psychological 1.2000 handle will be pivotal. Bulls will want to see the pair hold above the level to confirm a bullish continuation. The pair has already dipped below it briefly following the press conference but a break on a sustained basis will be important. Further support for the pair is found at 1.1967 which is a respected level on the larger time frames that is also within proximity of Friday’s spike high.