Although 25 members of the EU signed the new fiscal pact at the summit in Brussels, the group did not outline plans to shore up the ailing economy despite the promises made ahead of the meeting.
In turn, we saw the Euro extend the decline from earlier this week, with the exchange rate tumbling to a low of 1.3205, and the single currency may face additional headwinds in the week ahead should the European Central Bank cast a dovish outlook for monetary policy.
Indeed, the ECB is widely expected to keep the benchmark interest rate at 1.00%, but we may see President Mario Draghi keep the door open to expand monetary policy further in an effort to lift the economy out of recession. However, as the marked expansion in the ECB’s balance sheet comes under scrutiny, the central bank head may look to target the benchmark interest rate, and the short-term reversal in the EUR/USD looks poised to gather pace in the following week as we expect the Governing Council to preserve a cautious tone for the region.
As the 50.0% Fibonacci retracement from the 2009 high to the 2010 low (1.3500) holds up as resistance, we may see the euro-dollar come up against the 38.2% Fib (1.3100) to test for support, but the pair may ultimately give back the advance from earlier this year as the EU fails to shore up investor confidence. The psychological level at 1.300 is an important support and its failure could create the possibility for a 1.2620 low retest. On the upside only a break above 1.3450 and 1.3500 could target the 1.3600 level which is 200 Day SMA.
