EUR could rise violently if Draghi provides a pro-euro

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All the real action is expected later this morning, as traders await the press conference by ECB President Mario Draghi. But there were some events that occurred overnight, so lets get to those.

Update: The ECB left the rates unchanged as expected, focus on Draghi.

Update 2: Draghi Maintains Balanced Stance – EUR/USD Jumps.

Bank of Japan governor, Masaaki Shirakawa, presided over his last meeting today and the BOJ voted unanimously to keep rates unchanged at 0-0.1%. At the meeting, one board member proposed bringing forward open-ended JGB purchases, but that was voted down by an 8-1 vote. Another member proposed saying the BOJ would keep rates near zero until the 2% inflation target was achieved, but that was voted down by an 8-1 vote as well.

Analysts are looking at these two proposals as laying the ground work for incoming BOJ head Kuroda and many expect an interesting first meeting when he takes the reins later this week and presides over his first meeting in April. According to the BOJ, the economy has apparently “hit bottom”, so improvement is expected.

The USD/JPY has been relatively quiet overnight. It popped early in the Asian session to 94.11, then retreated after no surprises by the BOJ to 93.80, but is now once again attempting to grab the 94.00 handle. As Japan enter a new era with Kuroda in charge of the BOJ, speculation for rampant easing will eventually take hold and the USD/JPU should begin to rise. Resistance for now appears at the 94.20, the 94.45 area, with support at 93.80.

That meeting was just the appetizer. The main course is of course the BOE and ECB meetings later this morning. While no interest rate moves are expected, the BOE could surprise and expand their asset purchase program by GBP 25 billion. It is presently at GBP 375 billion per month. GBP is waffling around the 1.5000 level this morning. The likely scenario is the Bank of England stands pat on rates and QE. The currency action this morning is in anticipation of the QE move.

If nothing happens, as long as the accompanying statement is not overly dovish, the GBP should move back above the 1.5000 level. Support for GBP is at 1.4970, then 1.4950, while resistance is at 1.5030, then 1.5055. More: GBPUSD forecast.

So, after our salad (BOJ) and soup (BOE), here comes the main course. The European Central Bank is not expected to move rates when they meet later his morning. However, as with the other central bank meetings, the focus is on the press conference that will be given by President Mario Draghi 45 minutes after the rate decision is announced. In the past, Mr. Draghi has shown the ability to “influence” the currency with his remarks. Some expect these comments to include the chance for further monetary easing due to the poor economic outlook in the Eurozone. Recent PMI data has shown the Eurozone is still in economic contraction during the first quarter of 2013, although that contraction is slowing.

EUR has bounced above and below the 1.3000 level overnight, currently trading at the overnight high around 1.3035. Stops were triggered above 1.3010 earlier this morning as some EUR short positions lost their nerve and booked profits rather that take the risk that President Draghi doesn’t give his anticipated dovish talk.

The market had been overly short the EUR over the last few trading sessions so this is not a surprising move. Resistance in the EUR is at 1.3050, and there is speculation of further stops lying above 1.3055. This may cause a violent move higher is President Draghi comes out this morning with a pro EUR “rah-rah” speech. We shall see.

Further reading: EUR/USD – Edges Higher as ECB Rate Decision Looms

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Matthew Lifson is a Foreign Exchange Trader and a Market Analyst. with Cambridge Mercantile Group.