Euro Poised to Test New Lows Following Surprise Central Bank Activity

The Euro dropped and is poised to test the November lows, after dovish comments by Draghi generated headwinds for the European currency. In addition, the Peoples Bank of China surprised market participants with a rate cut that gave a boost to riskier assets. The dollar continues to gain traction as the interest rate differential between the US and Europe continues to move in the greenbacks favor.

Draghi boosted markets, focusing on inflation. He said that the ECB will do what it must to raise inflation as fast as possible, adding that some inflation expectations are excessively low. Dovish comments, with Draghi also saying that the ECB would broaden purchases if the current policy is not effective and that QE in Japan and the U.S. has led to significant forex depreciation.

China’s Peoples Bank of China unexpectedly cut interest rates, slashing one-year lending rate by 40 basis points and the one-year deposit rate by 25 basis points. The move has a similar shock impact as the BoJ’s unexpected expansion of its QE program had last month, and likely reflects Chinese policymakers’ determination to keep growth above 7.0% year over year.

The news of the Chinese rate cut boosted global equity bourses, and helped the Aussie dollar gain traction. The Euro was weighed down by the comments by Draghi as well as technical selling which is pushing the currency pair closer to support levels.

Target support on the currency pair is seen near the November lows at 1.2375, while short term resistance is seen near the recent highs at 1.26. Short term momentum has turned negative as the MACD (moving average convergence divergence) index generated a sell signal. This occurs when the spread (the 5-day moving average minus the 13-day moving average) crosses below the 6-day moving average of the spread. Additionally, the RSI (relative strength index) moved lower with price action reflecting accelerating negative momentum.

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