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Euro Plunges as European Central Bank Cuts Rates, Announces QE

Euro Plunges as European Central Bank Cuts Rates, Announces QE

2014-09-04 13:00:00
David Rodriguez, Head of Business Development
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- Euro trades to $1.30 versus US Dollar for first time since July, 2013

- European Central Bank cut all three of its benchmark rates by 10 basis points

- ECB President Mario Draghi announces the start of Quantitative Easing program

The Euro plunged to fresh yearly lows and tested the critical $1.30 mark versus the US Dollar as the European Central Bank cut interest rates and announced Quantitative Easing policies.

Few analysts and traders expected the ECB would move on interest rates and even less expected that ECB President Mario Draghi would announce the start of a Quantitative Easing program. Thus the Euro fell sharply lower across the board, but questions remain how much lower the Euro may go.

It is absolutely worth noting that the past two ECB rate cuts resulted in a similar EUR plunge only for the single currency to set a noteworthy short-term low immediately following the decision.

Euro Plunges to $1.30 as ECB cuts Rates, Tremendous Sense of Déjà vu

Euro Plunges as European Central Bank Cuts Rates, Announces QE

Source: FXCM Trading Station Desktop, Prepared by David Rodriguez.

And indeed it seems as though the Euro is at real risk of setting a short-term exhaustion low at or near these levels. We recently highlighted critical risks that the single currency could soon stop and reverse higher versus the US Dollar.

The immediate shock value and implications of the announcements are something to be respected. Yet we see that positioning remains extremely stretched; few speculators remain left to sell the Euro at these levels.

It’s likewise worth noting that ECB President Draghi said today that interest rates are at their lower technical bound; there’s essentially no scope for further interest rate cuts.

We find it difficult to advocate getting long Euro when the trend is so overwhelmingly bearish. But timing is everything in trading, and we think this is not the right time to chase Euro declines. In fact we see substantial risk that the EURUSD may set a fresh exhaustion low and turn higher.

--- Written by David Rodriguez, Quantitative Strategist for DailyFX.com David specializes in automated trading strategies. Find out more about our automated sentiment-based strategies on DailyFX PLUS.

Contact and follow David via Twitter: https://twitter.com/DRodriguezFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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