EUR/USD: Draghi’s drag has its limits – 3 reasons for the recovery

The euro suffered last week from a lack of conviction about inflation. The ECB raised its growth forecasts but did not alter inflation ones too much. More importantly, they did not change their stance on monetary policy.

EUR/USD was already on the rise and attempting to break 1.1860 but then dropped. The pair then extended its falls and reached 1.1735. But it is now moving back up, albeit capped by resistance at 1.18.

So, why is it rising now? Here are three reasons:

1)  Draghi drag is limited

One reason stems from that ECB meeting. Sure, inflation forecasts remain subdued, but they were still moved higher from 1.2% to 1.4% for next year. They weren’t changed for 2017 nor 2019. And, growth forecasts are significantly stronger, especially for next year: 2.3% against 1.8% in the previous outlook. That is big change for the near future, making it more important.

So, once the dust settled, the euro found reasons to rise in the initial event that brought it down.

2) Uninterrupted natural flows

Another reason is the basic fundamental feature of the euro: the 19-country currency bloc enjoys a wide surplus, mostly thanks to German exports. So, when nothing happens, the euro rises on natural flows of imports and exports. Today we don’t have any big news. In addition, we are nearing the holiday season and trading volume is lower. With fewer speculative moves, the natural forces have the upper hand.

3) US tax cuts already priced in

And what about the dollar side of the equation? We don’t have news about the tax bill, but the good news for the dollar is already priced in. If there aren’t any last minute surprises, both the House and the Senate will approve the tax cuts tomorrow. The dollar already advanced on this last week. What’s next? Any delay can hurt the dollar but the approval itself cannot help it too much.

All in all, EUR/USD could extend its gains. Immediate resistance awaits at 1.1810, followed by 1.1860 and 1.1910. Support is at 1.1760 and 1.1710.

More: G10FX: 4 Key Themes To Drive FX Performances In 2018 – EUR/USD could rise – Credit Agricole

Here is the chart:


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