The US dollar took a breather and was little changed on Monday after having been pressured for much of last week due to dovish signals emanating from key Federal Reserve speakers, including Chair Janet Yellen. Those dovish indications have come at a time when concerns about low inflation in the U.S. have already begun to erode expectations of an aggressive pace of monetary policy tightening by the Fed. The resulting pressure on the dollar last week helped boost EUR/USD to a new 14-month high, extending the sharp uptrend for the currency pair that has been in place for the past three months.
This week, EUR/USD focus shifts away from the Fed for the time being, as the European Central Bank takes center stage on Thursday in helping to determine the currency pair’s near-term trajectory. Rumors have been brewing and the markets have duly taken notice of the possibility that the ECB may be following other major central banks – including the Bank of Canada and Bank of England – in shifting towards a more hawkish stance. In the case of the ECB, this could possibly mean earlier-than-expected tapering of the central bank’s extensive stimulus (QE) programs amid a strengthening Eurozone economy and in the wake of ECB President Mario Draghi’s recent comments on rising inflation in the Euro area.
If any such hawkish indications emerge on Thursday, increasing market support for the euro could further extend EUR/USD’s uptrend towards higher highs. Of course, if Draghi vehemently and dovishly denies the prospect of tapering earlier than anticipated, the euro is very likely to drop sharply on a rapid withdrawal of market support for the shared currency.
Against this ECB backdrop, EUR/USD upside momentum continues to be strong for the time being. A bullish breakout to new highs may be imminent, which could push the currency pair towards the next major upside target within the current uptrend at the key 1.1600 resistance level. Such a move would likely be contingent upon any signal from the ECB suggesting tighter monetary policy on the horizon. To the downside, if the ECB continues its characteristic dovishness, a resulting EUR/USD drop could pressure the currency pair back down to major support around the 1.1300 level.