The ECB Acts, the Euro Responds

EURUSD Hourly 071113Hi, Friends, We still have tomorrow’s non-farm payrolls report to look forward to, but the European Central Bank generated some headlines earlier today by cutting its main lending rate to 0.25% from 0.50%. Central banks are normally concerned with combatting inflation. At the moment, however, with developed economies generally struggling, central banks from Tokyo to Frankfurt to Washington, DC are trying to generate a dash of inflation, which in small doses can provide a tailwind for an economy, with few obvious losers. 

One of the ways to encourage inflation is through a weaker currency, and the ECB and its President, Dr. Draghi, have clearly been concerned with the Euro’s relative strength. Of course, most nations want to see their currency weak relative to those of their main trading partners, but not every currency can simultaneously devalue. For today, at least, the ECB won, as the rate cuts, although not  a shock, still caught plenty of market participants long and wrong EUR/USD and EUR/JPY. One of the interesting things about FX is that the market tends to discount all news immediately, even if the ramifications of a new input will be felt far down the road. 

The drop to 1.3295 was quick, and retracements seem likely to be sold for the present. People will, it seems to me, be reluctant to chase it lower ahead of tomorrow’s non-farm payrolls number. Those who are already short have probably taken some profits, given that the 1.33 area has held. I would look for players to reload up to 1.3450 or so, and then look for another push lower once tomorrow’s U.S. data are out of the way. If there is another sag to the 1.33 level, I would also anticipate an attempt to break it, just to see who might still be long, and vulnerable. 

Thus far, 1.3382 has been the extent of the bounce, and on the hourly chart (posted above), we have consecutive inside vertical bars forming. The side that breaks first should help to provide some near-term direction. This is likely to be a skittish market until some time after 8:30 EST tomorrow. My own view is that the Fed can’t ease further, so the number tomorrow, once the smoke clears, will either be seen as neutral, or as the harbinger to “tapering”, which will tend to bring U.S. interest rates higher. That should be a positive for the Dollar, and a negative for EUR/USD. I’ll consequently be looking for a retest of 1.33, probably sooner rather than later. 

We’ll see how it turns out; best of luck!

About the Author kevin

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