* Euro zone political events could cap euro gains
* Euro/dollar technical outlook turns bullish
* US data next week unlikely to change rate outlook
(Updates prices, adds quotes, outlook)
By Gertrude Chavez-Dreyfuss
New York, Feb 18 The euro is likely to add
modest gains against the dollar in the upcoming week, bolstered
by increased expectations of a European Central Bank rate hike
and a fairly positive technical outlook in the short term.
The euro's rise, however, may be limited by a slew of
political events next week that may inject uncertainty. Some
analysts said the euro may get above $1.38 but was unlikely to
On the charts, the euro's prospects have turned bullish,
analysts said, with support clustered around $1.3250, the 61.8
percent Fibonacci retracement of the January to February
Resistance comes in at $1.3745, the Feb 9 high. A break of
that level should bring the rally back though $1.3862, the Feb
Aside from an upbeat technical view, the euro has benefited
on Friday from a report citing ECB policymaker Lorenzo Bini
Smaghi as saying the central bank will be ready to tighten
policy as price pressures mount. [ID:nLDE71H1DZ]
"The euro looks very well supported going forward," said
Richard Franulovich, senior currency strategist, at Westpac in
New York. "Aside from a hawkish ECB, central banks have been
buying euros for reserve diversification purposes. I think we
can hit that $1.3862 high again."
The positive prognosis on the euro comes amid expectations
of more political debate ahead of the election next Friday in
Ireland. Terms of the European Union loans to Ireland and the
fiscal consolidation plan would be two of the key issues.
There are also German regional elections, ongoing issues
related to Portugal, and possible debate about the new law on
capital requirement in Spain.
These may all add an element of caution in the market when
trading the euro.
Overall, analysts said it may well come down to interest
rate expectations. While the ECB ponders rate increases, the
Federal Reserve continues its Treasury purchase program, which
"was sized so as to represent about a 75-basis-point reduction
in the fed funds target rate," said David Watt, senior fixed
income and currency strategist, at RBC Capital Markets in
"As the...ECB muses on rate hikes, the Fed is still
effectively 'cutting' rates. Dollar rallies tend to fade when
these factors are put in focus," Watt said.
Bini Smaghi's comments come just two weeks after ECB
President Jean-Claude Trichet talked down the prospect of rate
hikes during an ECB February press conference, an about face
after sounding hawkish in January.
In late afternoon New York trading, the euro was up 0.6
percent against the dollar at $1.3685 EUR=EBS, after hitting
a high of $1.3716 on electronic trading platform EBS, its
highest in more than a week.
On the week, the euro rose 1.3 percent vs the dollar,
rising after two straight weeks of losses.
The ICE Futures' dollar index fell 0.4 percent .DXY to
Surprisingly the dollar, a traditional safe-haven along
with the Swiss franc, failed to capitalize on heightened
geopolitical tensions in the Middle East.
Westpac's Franulovich said the dollar's weakness amid
tension in that region may be attributed to general low
volatility across all asset classes, prompting investors to
take on more risk. Implied volatilities, which tend to reflect
risk sentiment in the currency market were trading near
Analysts said the dollar's performance next week depends on
action in the euro.
"The U.S. economic numbers next week won't change the
market's view on QE2 (quantitative easing), which is still
expected to end in June as scheduled, or interest rate
expectations," said Vassili Serebriakov, currency strategist,
at Wells Fargo in New York.
Meanwhile, currency speculators continued to trim bets
against the U.S. dollar in the latest week as they went short
the yen for the first time since June, data from the Commodity
Futures Trading Commission showed on Friday. See
(Additional reporting by Julie Haviv; Editing by Chizu