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Forex Flash: Euro setbacks to be temporary; EUR/USD to trend higher to 1.40 - Danske

"ECB masters verbal intervention." Following the Draghi's press conference, the EUR/USD collapsed around 200 pips in an impressive decline from 1.3570 to reach the lowest level since January 25th at 1.3370. Currently the pair is trading in consolidation mode around 1.3390.

On the euro exchange rate, "the ECB now specifically mentioned it as a downside risk to inflation but otherwise the tone was balanced," points the Danske Bank's analyst team on Draghi's speech. "The ECB will evaluate the effect on inflation in the new economic projections next month."

Danske continues believing thah "it will not be necessary to actually act and cut rates or make new long-term liquidity provisions. As economic indicators continue to improve, the bar for the ECB actually acting diminishes."

"However," Danske adds, "if the euro climbs above 1.40 and we get signals that the recovery is losing steam, this could trigger an ECB rate cut."

Danske sees that the risk in the near term "is on the downside for EUR/USD as EUR rates come somewhat lower." In the medium term, however, Danske believes that "euro setbacks will prove temporary," and the analyst team expects "EUR/USD to gradually trend higher towards 1.40 in coming months."

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