- EUR/USD said to have topped out after ECB concerns surface.

- Seen consolidating, risking profit-taking ahead of ECB decision.

- EUR/USD needs time to overcome ECB pain threshold at 1.20.

Commerzbank HQ dominates the Frakfurt skyline. Image © Andre Douque, reproduced under CC licensing conditions

EUR/USD spot rate at time of writing: 1.1840Bank transfer rate (indicative guide): 1.1424-1.1507FX specialist providers (indicative guide): 1.1660-1.1731More information on FX specialist rates hereThe Euro-to-Dollar exchange rate almost came undone last week and is widely expected to remain on the defensive ahead of Thursday's policy decision from the European Central Bank (ECB), which has voiced concerns about the single currency's strength and could now attempt to squash its rally.

Europe's unified unit clocked its highest level since early 2018 last Tuesday but was undermined midweek when ECB chief economist Philip Lane said the EUR/USD rate matters, even though the bank doesn't seek to manage exchange rates, because of the impact it has on growth and inflation.

Lane's comments incited fears of a sustained attempt by the ECB to push the Euro lower and have put the market on notice ahead of the September policy decision due at 12:45 Thursday which, along with the 13:30 press conference, is the highlight of the week.

"Lane will most likely continue to safe-guard the 1.20 area in EUR/USD with rhetorical intervention. The ECB is probably also looking into other easing measures as financial conditions in the Euro area remain fairly tight (in contrast to the US)," says Andreas Steno Larsen, chief FX strategist at Nordea Markets. "Eventually the ECB's ammo is just markedly less potent than that of the Fed, why EUR/USD is probably headed higher in 2021, but we remain firm that 1.20 will not be passed over the coming 1-2 months.

Rising exchange rates are sometimes a problem for policymakers because they disadvantage a country's exports by making them more expensive while hampering inflation outlook by reducing import costs and eventually, consumer prices.

The ECB has rarely met its target since the debt crisis, like many others, but may be more sensitive to a rallying currency than peers because it's seen as having some of the most limited capacity to provide support to its economy.

"Prices are still holding channel support in the 1.1785 region, but the gains at this stage look corrective. As such, we are biased for another leg lower, with 1.1850-1.1925 to provide resistance for that move.," says Robin Wilkin, Cross Asset Strategist at Lloyds Bank.

Above: Euro-to-Dollar rate shown at daily intervals alongside S&P 500 futures (black line, left axis)

"I’m not too concerned this merits cutting back our long EUR/USD position. If anything a further retracement might see folks adding," says Jordan Rochester, a strategist at Nomura. "Medium to long term factors still point to USD weakness and EUR strength. It would take European growth expectations to take a hit, renewed tensions in the US-China trade space and Trump’s odds in the US election to improve for this to be a sustained move higher in the USD."

Rochester says investors have bet on another interest rate cut from the ECB in the next year following Lane's comments but doubts the bank would go that far to restrain the Euro. He looks for an expanded bond buying programme if action becomes necessary but is also sceptical that this would be enough to dampen appetite for the single currency because it's still "5% cheap" in inflation-adjusted terms, while the Dollar is expensive on most measures of valuation.

"Verbal intervention from the ECB may prove more effective at dampening EUR strength in the near-term given that investor sentiment towards the EUR has become almost euphoric. The latest IMM report reveals record long EUR positions which are vulnerable to a squeeze. Yet to trigger a bigger reversal, the ECB will remain under pressure to deliver more stimulus, and it will test their reluctance to lower rates," says Lee Hardman, an analyst at MUFG. "EUR/USD will remain under selling pressure next week."

Nomura and MUFG forecast a Euro-to-Dollar rate of 1.20 by year-end while Nordea looks for 1.17 and one important determinant of which turns out to be right will be the approach taken by the ECB this Thursday and in subsequent months. In the short-term the ECB might be able to just talk the Euro lower but what matters most in the medium-term is if it can muster a credible threat of a policy offset or other type of intervention that discourages the market from continuing to bid the single currency higher.

Above: Euro-to-Dollar rate shown at daily intervals alongside Dollar Index (black line, left axis)

"Provided that dips remain well supported by the 4 month uptrend at 1.1721, an overall upside bias will be maintained. It should be noted that the intraday Elliott wave counts remain negative and the risk is for a break below the uptrend – failure here will target the March high at 1.1495," says Karen Jones, head of technical analysis for currencies, commodities and bonds at Commerzbank.

Before the ECB's address the Euro might be likely to take cues from stock markets that crumbled in the latter half of last week as well as German, French and Italian industrial production numbers for July. Those are out at 07:00 Monday before 07:45 and 09:00 on Thursday respectively. The data will indicate the extent to which the Eurozone industrial recovery slowed in July after strong rebounds in production were seen across the geographic board in June.

Meanwhile, the Euro enters the week leaving behind it on the charts a topping pattern that warns of a possible reversal of the uptrend. Commerzbank's Jones sold the Euro at 1.1905 and is targeting a fall to 1.1730 that leaves its upside bias intact, although others see risks of it falling below there.

"The EUR rally has clearly lost momentum. Moreover, the daily candle chart shows a bearish “shooting star” signal developed Tuesday as the EUR peaked which sets up the market for some degree of weakness at least. We look for initial support at the low end of the channel (1.1783 currently) but the August low at 1.1700 is critical support ahead of a drop to 1.15/1.16," says Juan Manuel Herrera, a strategist at Scotiabank.