Euro Slides After Draghi Comments, Investors Await Yellen

The euro hit the weekly highs to $1.12187 against the U.S. dollar, but later retraced its gains, by 0.15 percent to $1.11809 on Monday after the European Central Bank chief Mario Draghi defended the ECB’s easy monetary policy, and as investors are waiting for Federal Reserve Chair Janet Yellen’s speech on Tuesday. Draghi, who gave a speech to university students in Lisbon, noted that super low rates create jobs, boost economic growth and benefit borrowers, ultimately easing inequality. He also rejected calls to exit ultra easy monetary policy quickly, by arguing that premature tightening would lead to a new recession and more inequality. German businesses, as a dominant factor of European market, were feeling more positive than ever this month, according to a closely-watched business survey, which unexpectedly improved in the latest sign of confidence in Europe’s economic recovery. The Institute for Economic Research (Ifo’s) overall business climate index had already hit a record high last month, and June’s survey saw the index rise from 114.6 to 115.1, in contrast to predictions that it would ease slightly. Ifo’s two sub-indices which measure expectations and current assessment beat forecasts, increasing to 106.8 and 124.1 respectively. Euro zone’s economy would be positive as Germany’s economy is already in rude health, with unemployment at a record low and economic expansion of 0.6 per cent in the first quarter, and also experts are expecting the growth to continue. Fed Chair Yellen is set to deliver a speech in Europe on Tuesday, with investors’ expectation that she will maintain a positive outlook on the U.S. economy in spite of a recent batch of weak economic data, which hence is supporting the Fed’s forecast of raising interest rates once more this year and three times next year. The rate hike expectation helps improve the performance of the dollar against a basket of major currencies. With a reason that it already fuels enormous energy into the dollar, the long-term outlook of this strong performance may not be sustainable. The EUR/USD climbed 0.1 percent to $1.11910 as of 3:30 p.m. in Sydney. Technically with a sign of relatively strong Relative Strength Index (RSI) of 54.6686, the euro is consolidating in a daily developing ascending channel. This cannel as depicted below, has been created by connecting a series of swing highs and lows beginning with last Tuesday’s price action. In the event that the EUR/USD breaks lower, traders should first watch for the pair to breakout beneath 5-day moving average of 1.11763. Alternatively if prices continue to edge higher, the euro must first break above Monday’s high of 1.12187, then test the ascending channel line near 1.12259.

Chart 1: EURUSD Daily