EUR/USD: ECB fired its bazooka (video)
By Elizaveta Belugina
EUR/USD had a terrible week as it lost about 170 pips. The pair closed at $1.2950 after hitting $1.2920.
Euro was crushed the European Central Bank: despite expectations that it would stay on hold in September, the ECB lowered its benchmark and deposit rates. As the Wall Street Journal puts it, the ECB has entered a global currency war. The central bank wants to increase its balance sheet by 1 trillion euro through fresh loans – TLTROs – and asset-backed securities purchases (ABS) which aim to decrease euro and increase inflation.
The ECB and the Fed clearly are on the diverging tracks. There are forecasts that, if the Fed becomes more hawkish while the ECB balance sheet is expanding, the single currency could fall towards $1.20. However, such scenario is a subject to 2 risks. One risk is that the ECB won’t manage to buy enough ABS and covered bonds failing to increase its balance sheet enough. Another risk is that US economic performance will deteriorate and the Fed will delay hiking rates. Lower August Non-Farm Payrolls data have shown that there are reasons to believe that the US economic recovery is not sustainable yet. As for the euro area, it’s now up to counties like France and Italy to conduct structural reforms needed to boost growth potential, because until these nations are out of the woods, the euro area will keep having serious economic problems.
Let’s now move to the forecasts for the new week. Consensus projections anticipate better German trade balance and the euro zone’s industrial production, though French industrial production is expected to contract. Note that traders will be likely focused on assessing the news from the ECB and the US NFP, and it’s obvious that there are much more bearish factors for the single currency.
Now have a look at the chart. The big bearish candle is a powerful signal that the downtrend is firmly in place. The next targets are at $1.2790 (61.8% Fibo retracement of the advance from 2012) and $1.2750. Given the oversold nature of euro we’d allow correction to $1.3050 which should be a good place to add to short positions. The pair should be capped by $1.3150.