Consensus estimates are for ECB President Jean-Claude Trichet to signal an interest rate hike in July by using the catch phrase, “strong vigilance”. The risk remains for the ECB to disappoint investors by pausing again, as was the case in May. However, this time around market positioning is more balanced as traders scaled back long euro positions both yesterday and this morning.
A failure of the EUR/USD to breach above 1.4700 sapped a bit of momentum from euro bulls and gave traders an opportunity to scale out of some euro exposure before the ECB press conference later today.
A 25 bp rate increase appears to be priced into the euro and the EUR/USD would likely jump above 1.4700 to the next support at 1.4750 from the late April/early May lows at 1.4750 with a potential test of the May high of 1.4940. In the mid-term, a settlement from the “troika” to secure future Greek funding needs might give the EUR/USD scope to test the 2009 high at 1.5140.
Should Trichet not signal an impending interest rate hike in July, the euro will likely sell-off. While a decline may not occur in the same dramatic fashion as in May due to a more balanced market positioning that is less one sided in favor of the euro, the euro could decline both versus the dollar and in the crosses. The EUR/GBP has already come off of its monthly high/resistance at 0.8875 to trade below 0.8890. A breach of 0.8840 could lead to declines to 0.8750. This former resistance level has further significance as it coincides with a 61.8% Fib retracement of the late May to June move. The EUR/USD would also likely drop sharply. 1.4420 stands out as a 38% retracement and the 50-day moving average is nearby as well, adding further significance to this level. A deeper move could go to 1.4310 off the June low and the 20-day moving average.
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