ECB held its key reference rate at 0.75%, which was widely expected and EUR/USD responded with a weak rally. The real fireworks came after Draghi spoke, pushing EUR/USD from a high of 1.308 down to 1.295 before selling pressure abated.
5 Minutes Chart
What was it that Draghi said that caused EUR buyers to flee while we saw US equities rally?
Lets take a look at some key points from Draghi’s statement:
– “The economic weakness in the euro area is expected to extend into next year.” – Any cut in economic forecast is automatic Bad News
– “Inflation rates have been elevated for some time. More recently they have declined, as anticipated, and are expected to fall below 2 percent in 2013.” – Even though ECB aims to keep interest rate above 1% and below 2%, this is effectively Neutral. Lower inflation rates allow ECB to carry out their bond purchases with more ease, unlike their Asian Central Bank counterparts facing inflation risks. However, a decline in inflation also reflect the lack luster consumption/demand in the Euro-Zone.
– “(LTRO) injected a very significant amount of liquidity, but, to a large extent, this liquidity has not actually reached the real economy.” – This is nothing new, as LTRO only managed to achieve providing liquidity to mostly falling banks, nonetheless this statement will not give investors any confidence boost, but merely reinforcing the believe that ECB is simply using “Band-aids” as opposed to solving the real crisis. – Mildly Bad News
– “We would not tell governments what to do when it comes to the OMT.” – Rumors about Spain being “persuaded” to seek OMT help being squashed – Bad News
Price appears to be supported around the upward trendline, with a break opening back 1.27-1.28 support once more. Also, the 1.3125 ceiling remains respected after the ECB announcement, potentially forming a Triple Top after the Double Top + Bearish breakout formation failed previously. A support along the trendline will encourage bulls to push back to 1.3125 ceiling again.
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