Consequences of ECB's QE announcement

January 22, 2015 09:41 AM

Expectations were high heading into today’s European Central Bank meeting, but “Super Mario” Draghi was up to the task.

As we all know by now, the central bank announced a Quantitative Easing program to the tune of 60b per month, beating the whisper expectations of 50B/month, and most importantly, committed to buying assets for at least 18 months.

The market reaction to this bolder-than-anticipated announcement has been mixed: European equities spiked, then dropped; periphery bond yields fell to new record lows; gold rallied back to $1300; and the euro generally dropped. As of writing, EUR/USD is trading at 1.1480, down over 100 pips from pre-ECB levels, while EUR/GBP is pressing the bottom of its 18-month bearish channel in the upper .7500s and EUR/Swiss franc dropped back below the key parity (1.00) level to trade at .9850.

Technical View: EUR/USD

While the situation is still fluid – indeed Draghi is still speaking as we go to press – the big QE announcement should increase selling pressure on EUR/USD. The pair is just barely holding above last week’s 11-year low at 1.1460, but if that floor gives way, there is room down to the next level of minor support at 1.1375 or even the 61.8% Fibonacci retracement of the EUR/USD’s entire 2000-2008 rally around 1.1200.


That said, there are some potentially bullish signs in play as well. The RSI indicator on the 1hr chart is oversold, hinting at a potential near-term bounce, while longer-term positioning is at a historically bearish extreme, suggesting that everyone who intends to sell the euro may have already done so. In our view, another short-term bout of euro weakness is likely if rates break 1.1460 support, but bears should be extremely cautious as EUR/USD is ripe for vicious short squeeze.

About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.