ECB drives EUR/USD below 1.0600, but US data fails to extend the selloff

<p>It’s been quite a busy morning for EUR/USD traders, despite the impending US holiday. The fireworks kicked off at the start of today’s European session, […]</p>

It’s been quite a busy morning for EUR/USD traders, despite the impending US holiday.

The fireworks kicked off at the start of today’s European session, when a report from Reuters revealed that ECB policymakers were weighing more unconventional monetary policy tweaks in an effort to stave off deflationary pressures in the Eurozone. The two specific policies that the ECB is reportedly mulling over include a two-tiered bank charge to help the (primarily German and French) banks that hold massive reserves with the central bank and purchasing lower quality bonds that would then be repackaged with the current high-quality assets and resold. In some ways, this plan seems eerily similar to the synthetic CDOs that facilitated the US mortgage boom less than a decade ago.

Boiling down all the complicated econo-babble to a more understandable level, Draghi and company are still very concerned with deflation in the Eurozone and are considering unprecedented actions to try to stimulate the economy. Some measure of easing from next week’s meeting is all but inevitable at this point, and there’s a chance that the ECB will be more dovish than many traders currently expect. Predictably, this pushed EUR/USD lower, and the pair is now trading at a fresh 7-month low under 1.0600.

Heading into today’s US session, there was a chance for US data to proverbially “kick EUR/USD while it was down” but the data did not come out unanimously bullish for the US economy. While some of the releases were better than anticipated (notably including initial unemployment claims at 260k and durable goods orders at 3.0% m/m), others missed expectations (including core PCE at 0.0% m/m and personal spending at only 0.1% m/m).

On balance, it still appears that the US economy can support a small increase in interest rates next month, and we still expect the dollar-bullish trend to extend further over the coming weeks. Bond traders agree, with the yield gap between 2-year German and US bonds hitting its widest levels since 2006 earlier today.

Technical view: EUR/USD

Turning our attention to the chart, EUR/USD is working on a potential Bearish Engulfing candle* at the top of its bearish channel, signaling a shift from buying to selling pressure and opening the door for another leg lower from here. Meanwhile, the RSI indicator is back in oversold territory, but as we often note, an oversold reading alone is not a strong reason to expect a reversal in a strongly trending market, and as long as the bearish channel holds, we will continue to favor more downside in EUR/USD toward strong support in the 1.0500 area.

*A Bearish Engulfing candle is formed when the candle breaks above the high of the previous time period before sellers step in and push rates down to close below the low of the previous time period. It indicates that the sellers have wrested control of the market from the buyers.

EURDAILY11-25-2015 9-09-29 AM

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.