Although the market-defining EUR/USD currency pair looks to have failed again earlier today to breakout above the crucial resistance at 1.1250, the Euro has been the strongest currency of this week so far, rising against its main partners the U.S. Dollar, Japanese Yen, and of course the British Pound.
The U.S. Dollar has been weak this week, so we have seen most currencies rise against the greenback anyway. Looking beyond the time frame of 1 month, the Euro has also been the major riser over 2 months and 3 months. Why has the Euro been so strong recently? Is there even a good reason for this?
I don’t think the rise of the Euro over 2017 has had much to do with economic fundamentals or central bank policies, although that may be beginning to change. The initial drive for the upwards move, in my opinion, came more from the fact that this pair broke multi-year lows and attracted a lot of long-term buying, with a lot of other buyers jumping on the bandwagon. The upwards movement increased in momentum over the past few months, as factors such as renewed U.S. Dollar weakness helped push the move along. Political uncertainty in Britain and the prospect of financial services relocating from the U.K. to the Eurozone due to Brexit also played a part. Often in the Forex markets, a movement occurs, and traders look for a justification after the fact to determine whether to get in along the line of least resistance, i.e. with the momentum.
On Thursday next week (the same day as the British General Election), the European Central Bank will be releasing their next monthly Monetary Policy Statement, and there is increasing speculation they will drop their “forward guidance” of an easier monetary policy. This would be seen by the market that the cycle is beginning to turn in favor of a tighter monetary policy, but I think in a very mild and unconvincing way. I see this Friday’s U.S. economic data release as being more crucial and more likely to impact the Euro, which is poised as a key technical level of 1.1250 either for a meaningful bullish breakout, or for a bearish reversal.