EUR/USD Tanks After ECB Moves to Negative Rate; 1.35 Providing Support

EUR/USD Tanks After ECB Moves to Negative Rate; 1.35 Providing Support

The market has been anticipating some stimulus measure from the ECB throughout 2014 so far. Today, the ECB cut the benchmark interest from from 0.25% to a new record low of 0.15%, and moved the deposit rate from 0% to -0.10%, the first central bank to do so.

ECB Benchmark interest rate since 2006
ecb interest rate 6/5

The negative interest rate is meant to stoke lending. At the moment, the economy is weak, consumer spending low. There is some deflationary pressure, and unemployment rate remains elevated at 12% for the eurozone.

Here is a summary of the measures used by the ECB to stimulate lending:
– Preparation for purchase of asset backed securities – getting ready for large scale QE.
– Discontinue sterilization of SMP securities
– Interest rate will remain low.
– Unconventional measures are on the table. Draghi says they are “not done”.

We have been hearing about negative interest rates for two years now. Today’s announcement can be seen as highly expected – it was just a matter of time. Still, the fact that the ECB is indeed still dovish, and still has the door open for further stimulus action will put pressure on the EUR.

EUR/USD broke below this week’s consolidation range after the ECB decision, and extended lower during the ECB press conference.

EUR/USD 4H chart 6/5
eurusd 4h chart 6/5

The 4H chart shows the breakdown of the 1.3585-1.3650 range. This extends a bearish swing since the 1.3990 May and 2014 high.

The breakdown opens up the 2014-low at 1.3476. However, today’s price action is finding support around 1.35 during the presser.

Washout Scenario:
According to David Rodriguez of DailyFX, there is a spike in proprietary retail FX trading volume around the ECB event risk, “currently at largest 120min total since turn from 1.3990.

A the same time, he noted: “Post-ECB volume now the largest 120min burst in EURUSD trading since it set a low in November at $1.33.”

The point is volatility is high today, and seems like the volume seen at reversals.

EUR/USD Daily Chart
eurusd daily chart 6/5

Key Levels for post ECB reaction:

The key support will be the 2014-low at 1.3476. A break below 1.3470 suggests the market is still pricing in further stimulus action. There might be some brief consolidation or pullback. But the bearish outlook will now open up to the November 2013, low of 1.3295 to 1.33.

In the short-term, 1.3650 is key resistance. If the EUR/USD pops up above 1.3650, it would indicate the washout scenario, and thus open up the 1.3750-1.38 area. A break above 1.38 can revive a bullish continuation scenario, with upside at least toward the 1.3990 high.

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