EUR/USD Sees Support Breaking Ahead Of NFP

 | Apr 04, 2014 07:22AM ET

Yesterday's European Central Bank (ECB) meeting was not as dovish as I expected as Mario Draghi and company entirely failed to roll out actual new easing measures, such as the much bandied about cessation of SMP sterilisation or even a funding-for-lending scheme. All of the rhetoric on inflation pointed to a strong belief that no deflationary dynamic threatens, even if the Eurozone faces a long period of low inflation and that inflation will eventually pick up next year and thereafter. Still, the EUR bears could hang their hats on two things: that Draghi suggested growth risks were to the downside and, most of all, that the ECB was “unanimous” in its agreement that unconventional tools could be used if and when needed. Draghi even rounded this out in the Q&A by specifically mentioning quantitative easing. This eliminates the idea that the German Bundesbank sticklers will obstruct more aggressive ECB policymaking if the Eurozone numbers begin to weaken from here.

EURUSD pushed below the 1.3707 support, which was unable to contain the selling pressure and could be on the express train to 1.3500 or slightly lower. Note the EURCHF upside despite ECB dovishness; this was a theme I suggested was likely because a more accommodative ECB unwound the pressure on the CHF to strengthen it as a safe haven from EU tail risks. Interesting as well that EURCHF and EURUSD have been negatively correlated for some time now, suggesting that further EURUSD downside makes USDCHF the high beta way to look for further USD strength from here.

Chart: EURUSD
The main area of congestion lower in EURUSD would appear to come in between 1.3500 and 1.3400 and the rising trend line will hit that area about mid-May. We may need to either see clearly weaker Eurozone data and/or even clearer guidance from the ECB that it is mobilising actual new policy initiatives (rather than merely discussing its intention to use them if needed) to push EURUSD lower than that area. On the flip side, if we don’t follow through lower very soon and see weaker US data, a move back above 1.3800 would neutralise the downside bias.