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.