On Thursday the 25th of January, trading on the euro closed down on a day of high volatility. Sharp price fluctuations were seen on the major currency pairs as a result of comments from Trump, Mnuchin, Draghi, and Jordan.
After hitting a new high in the European session, the euro entered a sideways trend leading up to Mario Draghi’s press conference. There wasn’t much of a reaction to the initial decision. The ECB meeting on monetary policy concluded with decisions to maintain the refinancing rate at 0.0% and the deposit rate at -0.4%.
The QE program is being maintained until September at a volume of 30bn EUR a month. This could be extended should the need arise. Interest rates are expected to remain at their current level for the long term. Should the economic conditions in the Eurozone get worse, the scale of the program could be increased.
Mario Draghi noted that the Eurozone’s economy is growing faster than expected. Volatility on the single currency is a current source of uncertainty and so stimulus programs need to be maintained in order to keep inflation up. Inflation over the next few months is set to remain around its current level.
The euro/dollar pair jumped on Draghi’s comments as the Eurozone’s economy grows along with the euro. Euro bulls received some additional support from Thomas Jordan, the chairman of the Swiss National Bank, after he told reporters that the SNB was ready to intervene in the Forex market if needed. This would be on the EURCHF pair to weaken the national currency.
Donald Trump halted the dollar’s slide during the US session. In an interview with CNBC, he said that traders had misinterpreted Steve Mnuchin and taken his comments about a weak dollar out of context. The euro then dropped by nearly 200 pips from 1.2537 to 1.2364 (-173 pips).
Day’s news (GMT 3):
- 12:00 Eurozone: M3 money supply (Dec), private loans (Dec).
- 12:30 UK: GDP (Q4).
- 16:30 Canada: CPI (Dec).
- 16:30 USA: GDP (Q4), durable goods orders (Dec).
- 17:00 UK: BoE Governor Mark Carney’s speech.
- 21:00 USA: Baker Hughes US oil rig count.
Fig 1. EURUSD hourly chart. Source: TradingView
I have no desire to analyse markets when they react so strongly to verbal interventions because at times like these, the major players rely on crowd psychology to guide their trading. Also, we don’t know what other statements we could get from officials. It was enough just for Trump to say that Mnuchin’s comments were misinterpreted for the euro to slump by nearly 200 pips.
The price has returned from the zone between U3 and U4 to the LB balance line (sma 55). This marks a drop of 135 pips, and now the euro is trading at 1.2450. Given that the euro has dropped below 1.2389, there’s a chance of it correcting even lower on the daily pin bar with a long upper shadow. Moreover, the target of 1.2533 has been reached on the monthly timeframe.
My forecast has the euro recovering to 1.2475/80. If it stays with the trend, the price could rise as far as 1.2503, so don’t be in too much of a hurry to short the euro if that’s what you’re planning to do. Once a certain level is reached, you need to look at trader sentiment towards US bonds and euro crosses.