Euro Rebounds From Draghi Bottom But You Should Not Be Bullish

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Euro Rebounds From Draghi “Bottom” But You Should Not Be Bullish

The Euro Rebounds, But Don’t Get Too Bullish Yet

The ECB meeting was a big surprise this week. We were expecting some stimulus but maybe not the amount the bank delivered. Not only did Mario Draghi and his crew cut rates another 10 bps deeper into negative territory they started buying bonds again. The prime rate is now -0.50%, this means it costs banks money to leave it lying around, the idea is they will become motivated to lend and increase market liquidity. Market liquidity as you know leads to economic activity, GDP expansion, and the central bankers friend and foe, inflation. The rate cut was not unexpected. The bond buying and, more to the point, the banks overzealous claims, were a surprise.

The ECB says it will buy bonds at a rate of 20 billion euros monthly. This is all well and good but they say they can and will do this indefinitely. While the market appreciated the sentiment, most who know understand there are only so many bonds the bank can buy. Eventually they will run out and some say sooner rather than later. So, the news sparked a major sell-off in the EUR/USD that took the pair down to retest the recent low. Buyers were present at the support target and used the opportunity to close open shorts and/or open new longs.

Now it looks like the EUR/USD is in a reversal. I mean, it just created a double-bottom at a key support level and there are other bullish indications as well. Both MACD and stochastic are both showing entry signals, the caveat is twofold. First, the pair is showing resistance at the short-term moving average and the overall trend is down. Second, the resistance is also consistent with a previous low which makes the chance of bullish break out even less. Third and most important, the FOMC is meeting next week. They FOMC is expected to cut rates with a virtual 100% certainty and the outlook for future cuts is aggressive. The risk is in the data. Data including today’s Retail Sales does not support the idea of U.S. economic weakness so the FOMC is not likely to meet the market’s expectations.

The EUR/USD may continue higher in the near-term, the very near-term, as in the next two trading days. On Wednesday the FOMC will release their next policy decision statement and that I think will drive the dollar strength and this pair lower. PS, a bullish signal in a bear market like we have here is really the precursor (usually, more often than not) to another trend-following entry in the direction of the prevailing trend.

US AM Digest: Euro Rebounds as Draghi Downplays Recent Soft Data

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US Market Snapshot via IG: DJIA +0.3%, NASDAQ 100 +1.4%, S&P 500 0.5%

EUR : ECB kept its main rates on hold as expected, while the comments alongside the decision had been left unchanged. As such, a minimal reaction had been seen in the Euro. EURUSD reclaimed the 1.22 handle after Draghi noted that slight moderation in economic data may reflect temporary factors, while the ECB still sees solid growth. EURUSD briefly made fresh 2020 lows at 1.2143, however this was somewhat short-lived given Draghi’s upbeat assessment that growth remains on track despite recent soft data.

USD : The US Dollar has been on the backfoot today amid the pullback in US yields with the 10yr dipping back below 3%, subsequently providing a much-needed lift for its major counterparts. Much of the USD selling has been seen through GBPUSD which made a mild test of the 1.40 handle, ahead of tomorrow’s GDP report.

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SEK : The Swedish Krona is the notable laggard today following the Riksbank rate decision in which the central bank pushed back its rate hike path trajectory by noting that a rate rise is seen at the end of the year as opposed to H2 18 previously. The Riksbank also downgraded its growth forecast while upgrading their inflation forecast with the latter seen as a by-product of the recent rise in oil prices, alongside the significant decline in the SEK.

DailyFX Economic Calendar : Thursday, April 26, 2020 – North American Releases

IG Client Sentiment Index Chart of the Day: EURUSD

EURUSD: Retail trader data shows 52.0% of traders are net-long with the ratio of traders long to short at 1.08 to 1. The number of traders net-long is 11.0% higher than yesterday and 56.0% higher from last week, while the number of traders net-short is 0.5% lower than yesterday and 15.6% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EURUSD prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURUSD-bearish contrarian trading bias.

Five Things Traders are Reading

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— Written by Justin McQueen, Market Analyst

To contact Justin, email him at [email protected]

Follow Justin on Twitter @JMcQueenFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

EUR/USD Forecast: Looks bullish as Trump and Draghi are close to surrendering

Did Draghi do “whatever it takes”? Mario Draghi, President of the European Central Bank, has successfully won over his colleagues and convinced them to announce a new bond-buying scheme. The ECB will begin buying bonds at a pace of €20 billion per month from November – just as Draghi retires.

The money-printing scheme (or Quantitative Easing) came on top of a rate cut of 10 basis points and initially sent EUR/USD lower. However, as the dust settled, investors looked differently at the new measures. While the QE program has no time limits (something that may haunt the euro, later on, the initial scope of €20 billion is at the lower end of expectations. Moreover, the interest rate cut has also been limited and came with a tiering system – exemptions from the negative rate for some banks – thus limiting its effect.

Last but not least, the Frankfurt-based institution has upgraded its call on governments to do more. Draghi repeatedly said that countries with fiscal space should act and do it now. He praised the efforts and the success of the ECB in creating jobs and stabilizing the economy – also thanks to his pledge to “do whatever it takes” to save the euro. And now, he has thrown the ball in governments’ courts. Even if the bank could have done more, it has sent a message that it is near its limits.

Draghi has only one rate decision left as president before he passes the reins to Christine Lagarde. While the French politician may expand the QE program, euro bears need more immediate action to push the common currency lower.

US President Donald Trump also seems like he is ready to throw the towel on his trade wars with China. After postponing tariffs on China – for the second time in a month – he is warming up to an “interim deal” with the world’s second-largest economy. Such an accord would include removing some of the levies and settling for Chinese commitments to curb theft of Intellectual Property (IP).

Agreeing to minor concessions from Beijing and removing duties would be a significant blow for Washington and especially for “tariff man” – as the president labeled himself last year. It may be necessary to avert a recession ahead of the 2020 presidential campaign. For markets, calm in international trade is good news. Markets are currently cheering the story, and the risk-on sentiment is somewhat weighing on the greenback.

The focus now shifts to top-tier US data. 70% of the US economy is centered around consumption and the retail sales report for August comes just five days before the all-important Fed decision. Moderate increases are expected in sales after significant leaps in July. The US consumer is carrying the economy forward while investment is sluggish.

The last word of the week belongs to the American consumer as well. The University of Michigan’s preliminary Consumer Sentiment Index for September is forecast to show an improvement after a significant dip in August.

All in all, markets will be digesting the ECB decision, following trade developments, and watching US data.

EUR/USD Technical Analysis

EUR/USD has topped the 50 and 100 Simple Moving Averages on the four-hour chart and enjoys upside momentum. 1.1095 is critical resistance as it is the confluence of the 200 SMA and a level that worked as both support and resistance in late August.

Further up, 1.1115 capped EUR/USD late August and also earlier. Next, 1.1165 provided support in early August and was a swing high later that month. 1.1240 and 1.1285 are next.

Support awaits at 1.1070, which provided support in mid-August. It is followed by 1.1030, which was a swing low in early August and also provided support last week. Below the round number of 1.10, we find 1.0960 that was a swing low in late in August, before the double-bottom of 1.0927 – also the 2020 low.

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