EUR/USD tanked following the surprise ECB rate cut. The Central Bank slashed the benchmark interest rate to a record low of 0.25%, while bank refinancing rate was also similarly cut to 0.75%. Not only this, President Draghi also suggested that more rate cuts may be possible in the future, saying that policy makers could still cut rates further “in principle”, as ECB have “a whole range of instruments to activate before reaching the lower bound”.
Hence even though the rate cut was surprising, the resulting 200 pips decline was not. What is more intriguing is the strong pullback that followed, where prices retraced all but 50 pips of the losses during US session. Generally post event pullbacks are common, but in this case the retracement was significantly much higher considering that the news event turned out to be a huge bearish surprise. Swap Index was pricing in a 4% likelihood that ECB would cut rate this time round, so in theory we should have at least seen a huge revaluation of prices that was sustainable.
The magnitude of yesterday’s decline tells us that this new “equilibrium” following the new rate outlook is only around 100 pips, very little considering that expected rate cuts by the ECB in recent past have resulted in stronger bearish push. Hence, it seems reasonable to think that there are significant buyers of EUR/USD that do not deem ECB’s rate cut and future rate cuts as a worthy deterrent.
What could it be then?
One good reason could be speculators preempting a weaker than expected Non-Farm Payroll today, which speculators believe would fuel the case for continued or perhaps the off chance for additional Quantitative Easing. Ironically, with ECB surprising market with an easing move, the speculation for Fed to pull a dove out of its hat becomes even greater. This resulted in weakening of USD and helped pulled EUR/USD up yesterday.
However, unlike the ECB event which was unexpected, a weaker than expected NFP (lower than analysts consensus estimate of 125K to be exact) scenario could already be fully priced in. Hence bullish response may be muted later today, and the risk of a bearish surprise for EUR/USD is higher. Furthermore, the downtrend in EUR/USD remains in play, and even in the event that EUR/USD rally following a dismal NFP print, any failure to break 1.3525 – 1.355 resistance band may result in strong bearish response as it can be interpreted as a confirmation for overall bearish bias.
Moral the story?
Bearish EUR/USD remains, and speculators hoping to see weaker USD and hence higher EUR/USD may lose out. 2 wrongs doesn’t make a right, and similarly a weak USD coupled with a weakening EUR shouldn’t inspire a long-term bullish outlook for EUR/USD.