FX round-up: ECB may talk down the euro, traders say

The single currency drifted lower on the last day of the week, with traders highlighting that it might have strengthened too much for the European Central Bank's comfort.

"The USD was generally well bid on the day, but the rally hasn't progressed enough to signal a full trend reversal, as we await next week's action," said John Hardy at Saxo Bank, who picked out a key support level of 1.1500 in EURUSD.

On Thursday, the euro came under considerable selling pressure against the greenback and most other currencies after Ewald Nowotny, president of the Bank of Austria and a member of the European Central Bank's governing council was explicit in mentioning that the ECB was clearly missing its inflation target.

He added that the eurozone may “need an additional set of instruments, including structural tools”.

Against sterling, the euro's bearish reversal sets the tone heading into next week's ECB meeting. Hardy added that the meeting would need to emit some strong additional dovish hints to continue to drive the action lower.

Jeremy Cook, chief economist of World First, is another currency watcher expecting staunch reaction from ECB governor Mario Draghi next Thursday.

"In my opinion we will see the European Central Bank push back on these euro longs at next week’s policy meeting. Draghi has spent most of this year talking down the euro; fears over the tightened monetary conditions that a stronger currency would bring should ensure that Draghi does not deviate from that message anytime soon."

With resilient US core inflation also helping the pair, Cook added that he felt markets were mispricing the chances of a rate hike by the Federal Reserve in December – currently sitting at a 30.4% probability – and that "further USD strength will be seen as we move through the end of the year".

Elsewhere, after another strong performance on Thursday, the New Zealand dollar fell back into technical bearish levels on the daily timeframe.

FXTM analyst Lukman Otunuga noted that GBPNZD was trading below the daily 20 SMA and the MACD has crossed to the downside.

The Japanese yen continued to benefit from its status as a safe haven, with widespread confidence that the Bank of Japan will inject another stimulus in coming weeks.