Euro Dollar Exchange Rate Retains Form: "EUR seems to be a strong bid play for the day"

By Gary Howes

The euro exchange rate (EUR) complex is on Friday maintaining its new-found strength as markets accept the Eurozone is beginning to stand on its own feet.

The ECB left rates unchanged on Thursday, a move that provided EUR with initial support. However, the real rally started when ECB President Mario Draghi talked up the Euro and EZ interest rates by giving a bullish assessment of the Eurozone's outlook. Markets are reading this as a sign that no further loosening policy will be implemented.

The euro exchange rate complex is trading higher against almost anything in site:

Mario Draghi’s press conference following the release seems to give support to the EUR, and the ECB sees an upward revision to 2014 growth forecasts, with the economy expanding by 1.2 percent vs. a previous estimate of 1.1 percent.

"Further, positive comments coming from Draghi about the most recent economic data out of the region, citing better-than-expected purchasing managers’ indices and consumer confidence surveys, seems to have given support to speculation that the ECB is willing to execute on an interest rate cut sooner than previously anticipated. The EUR seems to be a strong bid play for the day," says Jonathan Terela at Western Union.

Euro dollar exchange rate outlook: Buy EUR/USD on dips

ECB aside, we hear from Stephen Gallo at BMO Capital Markets that the euro is looking attractive at current levels:

"Provided the ECB holds off from new measures today, we’ll be looking to buy EUR/USD on any dips into the 1.360-1.366 range.  That range is perfectly achievable on moderately dovish ‘verbal posturing’ from Draghi today, but something more aggressive will be needed to force that range to break on the downside. The odds of that aggressiveness appearing today are nothing more than a ‘coin toss’."

Meanwhile, analysts at ICN Financial are also predicting the Euro to rally:

"The pair remained stable below 1.3745 yesterday weakening positivity and leaving the pair affected by the negative signals on Stochastic and RSI. Stability above 1.3680 forces us to hold on to our positive expectations, whereas consolidating above the referred to level keeps the possibility of a bullish rush and an attempt to touch levels around 1.3810."

What would happen if the ECB cut rates?

Markets are not expecting any change at the ECB today, however the press conference could offer up some volatility.

Only the event of a rate cut would impact the EUR's near to medium term outlook in our view.

Shaun Osborne at TD Securities shares this view:

"Rate cuts should deliver a kneejerk response lower at least.  Thereafter, much hinges on the updated economic projections (weaker inflation/growth forecasts will weigh on the EUR additionally) and any jaw-boning (or not) that President Draghi’s press conference provides.

"We think the EUR ends the ECB press conference net lower overall but the main leverage in shorting the currency is likely to be found against the higher yielders (AUD and NZD); ECB rates are not going up anytime soon but the same can’t be said for the RBNZ or (relatively) the RBA.  We look for EURAUD to test key support around 1.50 shortly (and extend lower)."

Recall the November rate cut experience when the EUR fell sharply initially but closed well off the lows just under 1.33 and was trading above 1.36 less than a month later.  

"If there is easing and if the EUR is viewed as a hindrance to growth, Draghi might have to steer the EUR a bit more obviously lower.  While the market anticipations are quite fluid, no action at all today (and no push back on the EUR at the press conference) would be the  bigger surprise for markets.  In that case, EURUSD is likely to extend well through 1.38 and likely retest 1.39," says Osborne.