The current surge in EUR/USD may have been somewhat difficult to imagine just a few months ago when it seemed that most market participants had a strong bearish outlook for the currency pair. That bearish bias stemmed logically from the argument that the prevailing monetary policy stances between the European Central Bank (ECB) and the US Federal Reserve remained highly divergent, with a consistently dovish ECB pressuring the euro and an increasingly hawkish Fed supporting the dollar.
Fast forward to February of 2016, and the dynamics for at least one side of this currency pair have shifted dramatically. Now, with the Fed not only unsure about further interest rate hikes but also potentially entertaining the possibility of rate cuts and negative interest rates on the hazy horizon, the previously-rising US dollar has made an abrupt U-turn.
The Fed’s progressively more dovish trajectory since December’s long-anticipated rate hike has recently begun to weigh heavily on the US dollar and has been the primary driver of EUR/USD’s sharp surge in February thus far.
Whereas the months of December and January saw the currency pair consolidate within a tight trading range just above the key 1.0800 support level, the arrival of February brought increased concerns over turbulent financial markets, plunging crude oil prices, and slowing economic growth on a global basis. In turn, these concerns severely dampened speculation over future Fed rate hikes and led to broad-based dollar-selling.
This has been manifested as a strong surge in the EUR/USD that broke out above the key 1.1100 resistance level, and then followed-through to the upside to rise well above 1.1300 as of Thursday.
As the probability of further rate hikes by the Fed in the foreseeable future continues to diminish, the dollar could continue to undergo increased selling pressure, which could propel EUR/USD further up towards major resistance areas around 1.1500 and then 1.1700. To the downside, any sustained move back below 1.1100 support (previous resistance) would be a significant bearish indication that would invalidate the recent upside breakout.