EUR/USD Gains +159 Pips Driven By ECB Rumors And Levels to Watch Next Week 27th August 2012

The EUR/USD keeps slowly edging up after making a swing low a month ago. The pair opened at 1.2351 and finished the week 159 pips higher, closing at 1.2510. The main movers for the Euro pairs this week have been a couple of rumors concerning the ECB. The German weekly Der Spiegel and U.K.'s Telegraph reported that the ECB is planning to set a cap on peripheral bond yields. Other modalities being discussed included setting an informal cap, where the ECB would not publicly disclose its yield target level. Another option being considered was using the spread between German and peripheral bond yields as a target rather then targeting peripheral yields only.

Although the ECB denied these reports as “absolutely misleading”, few days later we got more leaks from “anonymous central bank sources.” The new leaks claimed that the ECB is thinking about setting a yield band as a target, instead of targeting just higher yields. Other ECB rumor from “two central bank officials” claimed that the Bank may wait for the decision by Germany‚Äôs Constitutional Court on the ESM before revealing the details of its bond purchase program. The Court is set to deliver its verdict on September 12 2012, few days later than ECB's next rate setting meeting on September 6.

The other major mover in EUR/USD happened on the U.S. side of the equation, with the FOMC minutes showing somewhat more dovish tone by the Federal Reserve. “Many” members of the FOMC said that unless new data shows a substantial strengthening of the recovery, additional monetary accommodation would likely be warranted. In the aftermath of the minutes, the EUR/USD gained over 55 pips, with other dollar pairs losing ground also. On Friday, in a response to congressman Issa, Fed's Chairman Bernanke said that there is scope for further action by the Federal Reserve.

Let's look at the levels to watch out for next week. To the upside the 1.2550/88 area will provide some resistance, 1.2588 was the high EUR/USD reached this week. Further up, 1.27 will provide resistance, followed by 1.2750. To the downside, 1.2450 will provide support, followed closely by 1.24. Just below 1.24, currently at 1.2372 is the trendline that underpinned the EUR/USD move upward from its swing low on July 24 up till now. If that level breaks, the 1.2234/50 area will provide support, followed by 1.2161. After that we're looking at the swing low at 1.2041 for support. If the July 24 low gives way, next comes the psychologically important 1.20 level. And if that level breaks, next support is seen at 1.1875, a low that the Euro made back in June 2010. See the chart below.

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