Binary bet of the week: Draghi delivered, but will the politicians?
by Dave Evans of binary.com
It was a huge week for Mario Draghi’s ECB with high expectations for Thursday’s Quantitative Easing package. The general consensus is that he did not disappoint.
The much vaunted QE program came in slightly bigger than expected and so far, there are few holes that analysts have found to pick through. Those holes will no doubt get bigger over time, especially the issue of limited risk sharing, but for now, the markets are satisfied.
So where now for the euro?
Draghi has delivered on his part, but now it’s the politician’s turn. The ECB has done just about all it can with monetary policy in the circumstances, but structural reforms need to be made at the fiscal level. Difficult reforms need to be pushed through, especially in the labour market, but this will be an uphill struggle. Greece is on the verge of electing a left wing government that will block or at least delay such reforms, while other Eurozone regions have hardly been champing at the bit to reform their economies. The importance of these reforms cannot be overstated, especially as German Flash Manufacturing PMI dropped below expectations on Friday.
Draghi’s QE program has many aims, one of which is to weaken the euro and thereby make European exports more competitive. This goal at least has been successful. The euro has been dropping for months in anticipation of QE and has dropped further as the plans came in bigger than expected.
EUR/ USD daily chart
As the daily chart of the EUR/USD above shows, the pace of decline has accelerated following the QE announcement, but the question is whether the euro has further to fall?
EUR/ USD Monthly Chart
The monthly chart above, shows that the EUR/USD has much further to fall by historical standards and we’re far from the lowest levels we’ve ever seen for the pair.
This is curious when you consider that the Eurozone is struggling to grow, with inflation levels bordering on deflation. By contrast, the US is no bed of roses, but its trajectory is at least in the right direction, with early rate increases next year a possibility.
Even if the Eurozone simply stands still for the next year, the US economy alone could tip the EUR/USD balance even higher.
Dollar Top?
So is more EUR/USD downside inevitable?
The answer is no for two reasons…
Firstly, the mere prospect of Quantitative Easing has been enough to push the EUR/USD lower. It was the mere anticipation of this that has been behind the recent selling, as traders look to get ahead of the curve. The follow on selling on Thursday and Friday could therefore be seen as a catch up adjustment as QE came in bigger than people had been betting up until this point.
Now that the news is out in the open, there is an argument that the impact of future QE is already in the price and that from this point forward, the euro’s destiny is not guaranteed to be lower.
Secondly, for the EUR/USD to retreat further, we need the dollar index to back off.
Dollar Index daily chart
Looking at the daily chart of the dollar index, you have to think that the only way is up, but there are signs that speculators are over exposed to the dollar – a position that has preceded declines in the past.
Despite these potential concerns, the euro is hardly a screaming buy, especially with the full effects of the Swiss National Bank’s shock move still to be felt.
A better bet for playing a euro decline might be the EUR/JPY instead of the EUR/USD. The yen has picked up some momentum this month, with the USD/JPY dipping even as the dollar index reaches fresh highs. The Bank of Japan has already released its shock and awe program, while the political fault lines within the Eurozone could mean QE will only be partially successful.
Disclaimer: This financial market report is intended for educational and information purposes only. It should not be construed as investment or financial advice and you should not rely on any of its content to make or refrain from making any investment decisions. Binary.com accepts no liability whatsoever for any losses incurred by users in their trading. Fixed odds trading may incur losses as well as gains.
Comments (0)