The EUR/USD is rallying strongly in reaction to today’s decision by the ECB.  Trichet announced the ECB is lowering its benchmark rate to 1%, in-line with analyst expectations.  In addition to the interest rate cut, the ECB has decided to move forward with quantitative easing-like measures.  The ECB will use roughly $80 billion to purchase Euro denominated bonds while extending maturities to 12 months. 

The EUR/USD is reacting positively to quantitative easing, as we witnessed previously with the GBP/USD after the BOE launched its own quantitative easing operation.  Investors believe ‘alternative’ liquidity measures will help the EU economy recover more quickly while counterbalancing deflationary pressures.  Furthermore, it’s encouraging to see the ECB being a little more proactive after providing mixed opinions which heightened uncertainty.  

We notice a pickup in volume on the EUR/USD’s up-bars as the currency pair retests May highs.  If the EUR/USD receives some strong volume to the upside over the next 4 hours, the momentum could be enough to send the currency pair beyond its present right shoulder.  Technically speaking, this could be a sign of a near-term breakout to the upside.  However, the EUR/USD may not be able to enjoy its upward momentum for too long since our two key barriers are approaching, 1.35 and our 3rd tier downtrend line.  Also, keep in mind the EUR/USD ultimately falls in line with its positive correlation with U.S. equities.  Therefore, if investors take profits in equities and sell on the news, the EUR/USD’s rally could cool as well. 

On the other hand, if the currency pair can manage to climb over these barriers, particularly the downtrend line, near-term gains could really accelerate.  With the S&P futures breaking free of their own restraints, the correlations are playing in favor of a broad based depreciation of the Dollar.  We maintain our bullish outlook for the aforementioned reasons.                

Fundamentally, we find resistances of 1.3442, 1.3474, 1.3497, 1.3536, and 1.3573.  To the downside, we see supports of 1.3420, 1.3389, 1.3359, 1.3322, and 1.3292.  The 1.30 area serves as a psychological cushion with 1.35 acting as a psychological barrier.  The EUR/USD is currently exchanging at 1.3413.

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