Yesterday’s ECB rate announcement was a non-event as expected. The Central Bank held its key policy rate at 0.25%, with EUR/USD barely moving 10 pips when the announcement was made. Strong market reaction/volatility only came 45 mins later when President Draghi made his scheduled press conference where he once again stressed that the ECB meant business and was “ready to consider all available instruments” (read: negative interest rates) to address any issues be it fall in consumer prices or liquidity problems which could potentially put stress on European banks.
This dovish talk drove EUR/USD to a low of just under 1.355, but the decline did not last long, with prices immediately pulling back and managing to close above 1.36 before the US session officially closed.
So what can we make out of it?
Firstly, we need to realize that Draghi didn’t say anything new. The Italian banker has said the same thing during the rate announcement in December, and there was no hint or clue of tools that he may use. Recently Draghi was quoted saying in interviews that he is comfortable with current interest rates, and will need to see actual need arising before unleashing another round of LTRO. If we put 2 and 2 together does it mean that ECB will use other tools to revitalize the market if needed? Or perhaps when Draghi says that the ECB is “ready”, is this a tacit admission that they are not going to do anything for the time being and will only act in the future if need be? Ultimately, Draghi’s words can be interpreted both ways depending on your bias, and hence traders who believed that Draghi was dovish may be overreacting.
Hence, it is no surprise that the pullback happened. What is more interesting is that prices have continued to climb up higher during Asian hours despite a clear “risk off” morning with Asian stocks opening and trading lower. Currently price is testing 1.361 resistance and is appearing to be getting the better of the resistance. If the break is confirmed, a push towards 1.363 resistance is possible, but above that may be harder considering that Stochastic readings are already within the Overbought region. Furthermore, just as how yesterday’s bearish response was over-enthusiastic, there are signs of equal if not more enthusiasm in current rally as we do not have good reasons bar technicals/volatility to account for it. Hence, directional follow-through is unlikely, adding strength to the key 1.363 resistance.
On the weekly chart, we can see that price is consolidating itself between 1.358 to 1.363. This was one of the scenarios that we’ve mentioned may happen given the Triple Top pattern together with Stochastic being Oversold. With Short-Term showing no strong directionality, we could see prices continuing to remain in this consolidation for a while which will allow bears to recover before the next big bearish push towards 1.35 and eventually 1.31 long-term bearish target. Today’s NFP will be a good litmus test as more volatility will come in before and after the news release. If prices continue to stay within the consolidation zone after the dust have settled, the probability of an extended consolidation period increases, and bears will definitely have to wait longer to before seeing bearish conviction coming in once more.
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