ECB Rate Cuts Send Euro Tumbling
Today’s Spotlight Market
The short Euro futures trade was already popular among speculators with nearly 200,000 net short positions established in the Euro futures between large and small traders. We should expect to see in upcoming Commitment of Traders reports that? additional net-short positions were added following the European Central Bank (ECB) interest rate announcement as the sharp-selloff? in the Euro may have been viewed as a signal for trend following traders that the currency was potentially headed even lower given the bearish comments from President Draghi.???? ?
Fundamentals
The European Central Bank ECB surprised currency traders on Thursday as three key interest rates were lowered. The main lending rate was cut to 0.05% from 0.15% and the overnight lending rate was lowered to 0.30% from 0.40%. The cost of banks parking excess funds at the ECB also became more expensive with a negative rate of -0.20%.
Most analysts were expecting no change in interest rates following the ECB meeting, believing that a statement from ECB President Mario Draghi in June that the central bank had reached the lower bounds for interest rates. In addition to the rate cuts, it was announced the ECB will embark on two programs to purchase asset-backed securities as well as covered bonds.
The dovish rhetoric from the ECB President sent the Euro sharply lower vs. the U.S. Dollar and is now trading at lows not seen since July of last year. With Eurozone inflation running at 0.3% last month, which is a far cry from the targeted 2.0%, the ECB appeared forced to take some action to show it is serious about trying to stimulate economic growth in the hopes of encouraging both corporations and individuals to begin spending and borrowing which is something that has been lacking in the Eurozone since the 2008 banking crisis. ?
Technical Notes – View Today’s Chart
Looking at the daily continuation chart for the Euro futures, we notice the sharp sell-off on Thursday following the ECB rate cut announcement. The Euro was already in a bearish trend since the middle of July as the uptrend line drawn from the July 2012 low failed to stop the Euro?s decline. Heavy volume was seen on Thursday as trend-following traders added to existing short positions and weak bulls ran for the exits. The 14-day RSI has plunged well into oversold territory with a current reading of 16.75. 1.2750 is seen as the next major support level for the Euro, with resistance found at 1.3222.
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