Good morning from beautiful Hamburg and welcome to our last Daily FX Report this week.
In the important decision, European Central Bank President Mario Draghi said the ECB may wait expectantly into bond markets in tandem with Europe’s rescue fund, stepping up its crisis response despite the reservations of Germany’s Bundesbank.
Nevertheless, we wish you a great and relaxing weekend.
Market Review – Fundamental Perspective
Mario Draghi said in its statement yesterday in Frankfurt, that the euro cannot be undone and keeping the benchmark interest rate at 0.75 percent. Draghi said that elevated bond yields that are related to fears of the reversibility of the euro are unacceptable, and they need to be addressed in a fundamental manner. The European Central Bank will consider further non standard monetary policy measures according to what is required to repair monetary policy transmission. In the coming weeks, they will design the appropriate modalities for such policy measures. Draghi's comments were consistent with a report in the last Thursday edition of an interview, which indicated that Draghi intends to resume the ECB's controversial program of buying sovereign bonds from struggling euro zone member states on the secondary market. The report also indicated that Draghi backs a proposal by which the euro zone's permanent bailout fund, the European Stability Mechanism, would buy sovereign bonds directly from crisis stricken countries. On Thursday, Draghi said that he will do everything to save the euro. After the announcement the euro declined and Spanish bond yields rose on disappointment that Draghi didn’t signal imminent ECB action. While Draghi said the Bundesbank has reservations about ECB bond purchases and the details of the plan still need to be better planed, the proposal nevertheless signals a new way in the battle against the debt crisis. The European Central Bank President left open the question of whether the ECB would create and print new money by refraining bonds.
Meanwhile, the EUR declined 0.6 percent to 95.302 JPY. The EUR also go down 0.7 percent to 1.21304 after climbing 1.5 percent to 1.24052, the highest level since the 5th of July. The USD fell 0.3 percent to 78.242 versus the JPY.
Daily Technical Analysis - In this section we provide chart analysis
EUR/USD (Daily) – The Disappointment Could’t Have Been Greater
"Draghi took off like a tiger but finally turned into a rug", a trader was quoted to have said in a DJNW voice-over thus describing the tone in the markets. Most of us have known it before or at least have suspected that Draghi would not turn his strong words of last week already into action yesterday. Nonetheless many have speculated in this direction. The ECB press conference, however, did not reveal any new details and the reaction to this couldn`t have been clearer.
Yesterday morning the US currency clearly pushed higher against the Euro to reach a recovery
high at 1.2406 USD just immediately before the ECB press conference. Building on our analysis
of yesterday the pair almost reached the target set previously in the 1.2400 / 1.2450 USD area.
But then a reversal occurred which triggered a strong pull back to a daily low at 1.2132 USD
without the Euro recovering convincingly from that level again.
From the analytical point of view the resistance zone towards 1.2335 might become increasingly
important. With regard to bearish moves we have to wait whether the price will be able to
stabilize towards the 1.2161 mark. The pair should break the 1.2042 USD level in order to keep
the positive tone at least somehow alive. The directional filter set-up is still constructive,
momentum, however, is diminishing.
EUR/GBP (Daily) – Disappointment Pushes Prices Lower – But Directional Filter Remains Constructive
The expectations of a positive surprise by Draghi at the ECB press conference lifted the Euro to a high at 0.7910 GBP in the early afternoon yesterday, but it just missed marginally the immediate target resistance at 0.7915 GBP, before the disappointment and the selling pressure overwhelmed the pair and forced it back to its recent breakout level at 0.7872 GBP and also temporarily below the daily low of Wednesday this week.
This may lead to a diminishing upside impetus. Whether the upside impetus will completely disappear or not remains to be seen. Despite this day of weakness the market techniques might still be positive. The Momentum still moves on a high level, even if it is decreasing slightly after yesterday`s price action. The underlying directional filter, however, still indicates upwards movements. Here we assume an impending set-up shift to “long”.