ECB Cuts Rates and Signals QE; EUR/USD Outlook

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ECB Cuts Rates and Signals QE; EUR/USD Outlook

The European Central Bank (ECB) met and voted on its monetary policy. The bank surprised forecasts as the governing council voted to cut the benchmark interest rate from 0.15% to 0.05%. It also reduced the deposit rate from -0.1% to -0.2% to discourage saving and encourage more lending.

mario draghi

Mario Draghi, President of the European Central Bank (ECB)

More importantly, bank president Mario Draghi said further action will likely be on the horizon. He is referring to the plan to start buying asset-backed securities in October. This is not exactly Quantitative Easing, but it will have a similar effect. According to Draghi, QE is also still on the table. During the press conference, he noted, “the governing council is unanimous in its commitment to using additional unconventional instruments”. He answered questions noting that “Yes, QE was discussed”.

EUR/USD Reaction and Outlook:

The market took today’s dovish action and tone as a reason to sell the Euro. The EUR/USD was stalling around 1.3150 before the ECB statement and presser. After the event risk, EUR/USD fell to about 1.30 as traders price in prospect of QE in upcoming meetings.

The 4H chart shows a market that has already been persistently bearish.
– The moving averages are sloping down, in bearish alignment, spreading apart, and above price action. This is a bearish trend running of all cylinders.
– The RSI was held below 60 and pushed back below 30, even below 20. This shows persistent bearish momentum.

EUR/USD 4H Chart
eurusd 4h chart 9/4

(click to enlarge)

When we look at the daily chart, we can see that the RSI here is oversold as well. We might expect some near-term to short-term consolidation around 1.30, but the downside risk is heavy at the moment.

Below 1.30, the next key support will be around 1.2775-1.28. Here was have some previous support pivots, and the 61.8% retracement level of the 2013-2014 rally from 1.2041 to 1.3991

EUR/USD Daily Chart 9/4
eurusd daily chart 9/4

(click to enlarge)

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.