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Will EUR/USD Hit 1.24?
Thursday’s European Central Bank Monetary Policy announcement is one of the most highly anticipated event risks this week and the euro is trading soft going into the rate decision. It is no secret that the ECB maintains a dovish monetary policy stance and intends to increase stimulus if the economy weakens further. This stance contrasts sharply with that of the Fed whose rosier outlook for the labor market reset expectations for a mid 2015 rate hike. With tightening expected to be the Fed’s next move and easing to be the ECB’s, its no wonder that EUR/USD is trading near 2 year lows. However the main question is whether these losses will continue on the back of Thursday’s announcement. We do not expect the ECB to follow in the Bank of Japan’s footsteps by increasing stimulus. Yet if they decide to expand purchases to corporate bonds, it would represent an increase in stimulus that would be negative for the euro. If they simply reiterate their plans to raise stimulus but fail to follow through with fresh action, given the overstretched nature of euro short positions, a short squeeze could drive EUR/USD higher.
Taking a look at the weekly chart of EUR/USD, the next area of support is 1.24 followed by the 200-month SMA at 1.2220. If EUR/USD recaptures 1.26, the rally could extend as far as 1.28, near the 50-day SMA.