EUR/USD is hugging 1.11 at the time of writing. This is above the 1.1050 level that capped its wide range trading. It already reached 1.1186 earlier in the day.
The move was certainly decisive and leaned not only on the obvious USD weakness but also on some euro strength. Nevertheless, the question must be asked: is it a real break?
EUR/USD was itching to make a move higher and flirted with the 1.10 level. One of things pushing the pair higher was a stronger than expected German inflation number: +0.3% y/y, better than predicted.
The poor US GDP report, that showed an annualized growth level of only 0.2%, basically nothing q/q, set the pair on fire: euro/dollar shot above the all important level and continued advancing gradually. It was no knee-jerk reaction but rather a healthy move higher.
But then came the FOMC Statement. Basically, the Fed had the Q1 numbers and blamed them on the weather. It acknowledged the weakness but saw it as temporary.
Digging deeper into the report, we have been given a hint about the Fed’s expectations for more shopping, and perhaps a hint that the next set of indicators, namely wages, will be better.
If the US employment cost index and core PCE also continues ticking higher, we could see 1.1050 broken back to the downside, despite its proven importance.
It happen later or even beforehand. In the bigger scheme of things, the Fed is still on course to tighten this year: a rate hike is still firmly on the cards in 2015.
And on the other side of the pond, the ECB is still determined to continue printing money, continuing with its QE program until 2016. Draghi sees his better forecasts achieved only on the full implementation of the program.
So, monetary policy divergence is here to stay, despite the very necessary correction that came on good foundations.
Below 1.1050, 1.10 is an obvious level, but not so strong. Further support awaits at 1.0920, followed by 1.0860. On the topside, 1.1186 is immediate resistance, followed by 1.1250 and 1.13. The top line is 1.1383.
