Euro reverses losses after Draghi remarks

March 11, 2016

The monetary policy easing measures implemented by the European Central Bank (ECB) on Thursday substantially exceeded expectations, prompting an immediate rise in equities and a swift and dramatic plunge for the euro against other major currencies. Shortly after a broad array of rate cuts and asset purchases was announced, however, the euro entirely reversed direction after ECB President Mario Draghi indicated in a scheduled press conference that further rate cuts were not needed or anticipated.

Despite having delivered significantly more than anticipated in terms of additional stimulus, Draghi’s conditional preclusion of further rate cuts weighed on European equities and boosted the euro to new intermediate highs. This upside reversal was manifested on the EUR/USD as a sharp surge above major 1.1100 resistance.

While not as disappointing as December’s under-delivery of easing actions, the press conference essentially amounted to a forward-looking disappointment due to Draghi’s relatively strong comments regarding future rate cuts.

For the EUR/GBP, this closely-watched cross currency pair briefly fell well below the 0.7750 resistance level immediately after the ECB easing package was announced, but soon reversed and surged substantially above that level after the press conference.

While this euro surge has been strong, it remains to be seen if it can be sustained, especially in light of the rather extensive easing measures that were actually slated to be implemented. For the EUR/GBP currency pair, there is also the very important consideration of how the Bank of England’s monetary policy stance has evolved. This should be clarified a week from now when the UK central bank is scheduled to hold its key monetary policy meeting and summary.

From a technical perspective, EUR/GBP had been rising in a clearly-defined uptrend since early December before breaking down below its uptrend line in the beginning of March. This breakdown extended further below the noted 0.7750 support level before recently reaching down to its 50-day moving average. The currency pair was on the verge of a breakdown below that moving average before Thursday’s Draghi-driven reversal lifted it well above.

In the event that the current rally is prolonged and extended, major upside resistance is at the key 0.7900 level. Any breakout above that level, especially if the Bank of England issues a dovish summary next week, would confirm a continuation of the bullish trend, with the next major upside target around the 0.8050 resistance level.

In the opposite technical scenario, the currency pair has just formed a clearly bearish head-and-shoulders reversal pattern. This hints at a potential exhaustion of the uptrend that has been in place since early December. In the event of a turn back to the downside and a subsequent breakdown below this pattern, the next major downside target is around the key 0.7450 support level.

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