9 Minute Read

ECB Breaking News Finally Here!

January 22, 2015

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The big anticipated news from Mario Draghi and the European Central Bank finally came and past. Mostly no big surprises, and everything is pretty much priced in ahead of time. Expectations were high heading into today’s European Central Bank meeting, but Draghi was up to the task.
As we all know by now, the central bank announced a Quantitative Easing program to the tune of €60b per month, beating the whisper expectations of 50B/month, and most importantly, committed to buying assets for at least 18 months.
The market reaction to this bolder-than-anticipated announcement has been mixed: European equities spiked, then dropped; periphery bond yields fell to new record lows; gold rallied back to $1300; and the euro generally dropped. As of writing, EUR/USD is trading at 1.1480, down over 100 pips from pre-ECB levels, while EUR/GBP is pressing the bottom of its 18-month bearish channel in the upper .7500s and EUR/Swiss franc dropped back below the key parity (1.00) level to trade at .9850. There were a number of earnings reports, several economic releases around the globe, many missives from the World Economic Forum in Davos, and plenty of early action in the oil market. It was all relevant, yet it was all essentially relegated to background noise in front of the ECB meeting, which generated a bullish buzz ahead of Mario Draghi’s press conference.
That buzz resonated in the S&P futures market, which spiked to its highs of the morning after the ECB announced it decided to leave its key lending rates unchanged (0.30% for the marginal lending facility; 0.05% for main refinancing operations; and -0.20% for the deposit facility).
The interest rate guideline, however, wasn’t the kicker. The kicker was the pregnant declaration that “further monetary policy measures” would be communicated by Mr. Draghi at the press conference. In the market’s mind, that was code for “a QE plan is on the way.”
Mr. Draghi left the door open, though, for the program to continue beyond 2016, as he qualified that it will be conducted until the ECB sees a sustained adjustment in the path of inflation toward its target of below, but close to, 2.0% over the medium term.
the big QE announcement should increase selling pressure on EUR/USD. The pair is just barely holding above last week’s 11-year low at 1.1460, but if that floor gives way, there is room down to the next level of minor support at 1.1375 or even the 61.8% Fibonacci retracement of the EUR/USD’s entire 2000-2008 rally around 1.1200. bears should be extremely cautious as EUR/USD is ripe for vicious short squeeze.

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