EUR/USD Mid-Session Analysis for July 26, 2012

By FX Empire Analyst - James Hyerczyk
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Positive comments from European Central Bank President Mario Draghi are driving the EUR/USD higher on Thursday. Although this initial move in the market may have been driven by short-covering, his comments do represent a possible shift in sentiment since it is coming from the top person in the European Central Bank.

Making a vow that the central bank will do anything in its power to support the Euro, Draghi unleashed a flurry of short-covering on the fear that his comments may represent a shift in sentiment from the “higher-ups” in the ECB. Speaking at a conference in London, he said, “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro.” Later he added, “Believe me it will be enough.” 

This makes it sound like the ECB feels that all the pieces are in place for the central bank to make a unified attack on the real issues working against the Euro Zone. After making several strategic monetary policy related moves, the ECB has finally determined that in order for these moves to take hold, interest rates must come down in Spain and Italy.

Daily EUR/USD Chart

Daily EUR/USD Chart

Spanish and Italian bond interest rates dropped almost immediately after Draghi’s comments. This is a sign that Euro investors feel that the ECB is gearing up for another round of bond purchases in these two struggling countries. If the ECB can keep the cost of borrowing low then it may allow monetary policy to work. At least this is the plan.

At this time, short-covering is still driving the Euro higher with very little fresh buying present. Technically, a support base must be built to send a signal to traders that a serious bottom is being formed. The longer-term fundamentals remain weak despite Draghi’s comments and the majority of short traders will not budge until the more serious issues are taken care of. One of the issues that remains is what does Draghi mean by “mandate”. The key to the firepower that the ECB can release will be based on what it is allowed to do under the current Euro Zone agreement.

Technically, the EUR/USD turned its main trend up on the daily chart when it crossed 1.2324, but the move did not attract much buying attention beyond that as it stalled at 1.2326. If it can pick-up some additional upside momentum then it may continue up until it reaches a key retracement level at 1.2394.

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