By FX Insights Moderator
Did you enjoy today's 200 pip drop as much as you enjoyed it on Tuesday? I hope so... we surely did, these are the kinds of days we live for as traders!
So what drove the euro down today? Very simple -- his name is Jean-Claude Trichet, and right now, I'd love to shake his hand!
As expected, the ECB held interest rates at 4.00%, but it was what Mr. Trichet had to say at his press conference that caused the euro to get beat up in today's trading... lets re-cap:
Back in November we started giving warnings that European growth would slow in 2008 and that the ECB would eventually be forced to cut interest rates, hopefully those of you who were around back then and read the updates will remember... in fact, I've probably devoted a dozen or more updates over the past few weeks talking about this and now we're finally starting to see the market respond to Europe's weakening fundamentals and the market's speculations of ECB rate cuts.
At this morning's press conference, Trichet was the most dovish about European growth as I've ever seen him... in addition, he basically said that current interest rates would be just enough to stabilize European inflation... plus, he indicated European inflation would subside while downside risks to growth would grow! He almost seemed relieved to get all this off of his chest, it was very odd to watch and observe his body language, but that's an important thing we do because it can signal how the market will decide to react, which was clearly to bring the euro down...
In nutshell, Trichet told the markets the following:
*Rates are on hold and will not need to be raised = EUR-
*M3 growth is slowing = EUR-
*Inflation pressures will subside this year = EUR-
*Growth facing serious risks to the downside = EUR-
*Risks to GDP are on the downside = EUR-
*ECB will not surprise markets = EUR-
Basically, Trichet gave the market six major, mega, no-brainer reasons to short the living crap out of the EUR/USD and to likely keep shorting it in the near-term...
With Trichet giving the market the greenlight to unload euros today, his comments triggered a chain reaction of profit taking, loss taking, and shorting of the EUR/USD, which took us down another 200 pips from yesterday's topside resistence at 1.4638... and as far as today's down move goes, the EUR/USD held to its very reliable pattern of not making a move (up or down) of more than 200-220 pips during a trade day. It moved exactly 201 pips from the top of the range at 1.4638.
As we indicated, sustained break of 1.4550 would open the doors to the downside and we certainly saw this play out in today's market action...
So now we have the EUR/USD making two 200-pip moves down so far this week... if patterns hold true, we'll likely see a retracement back up as the market is slightly overextended and exaggered itself this week... that being said, we have seen EUR/USD patterns where it'll move 500 points in a week, but this is very rare and I'm not expecting this to play out before we see a bit of retracement...
EUR/USD trading...
As we indicated, the break below 4740 took away the market's momentum to push the euro up any higher and now the break below 4550 has opened the doors to test lows we haven't seen for weeks and months.
For most of last year the market punished the dollar for its weak fundamentals and then for the Fed rate cuts... the dollar has recieved the worst of its punishment in the near-term...
The market has yet to fully begin punishing the euro for it's weakening fundamentals because the Eurozone's fundamentals have just barely started to show signs of decline and weakness, which means we have a potentially long road ahead of us... then, the market will need to punish the euro for the ECB rate cuts that are likely coming this spring or sometime early in the second half of this year...
By that time, we'll be in a full-blown U.S. recession, and the global markets as a whole will be crumbling all around us... we've already talked about what a recession will do to gold and the dollar, so I'm not going to take time to get into that now, you can read those posts...
As far as trading goes, I'll be shorting the rises, as indicated in yesterday's update and in the chat today... the only time I'll likely take a euro long is when we trigger a signal... on an intraday trade basis, I will likely be short when I trade within a range...
I would love to tell you where the market will decide to find a bottom or find the next top, but please understand that the landscape is in the beginning stages of shifting...
The dollar's been beaten up left and right, up and down all last year... the market already knows the fundamentals are crap, that interest rates are abysmal, that the jobs market is fickle, and that growth is slowing to recessionary paces -- there are no more big secrets to reveal about the sad state of affairs with the U.S. economy...
For Europe, on the other hand, the secrets are just now coming out and the market has just begun licking its chops to do to the euro what it did to the dollar... at least this is how I see things playing out... I could be dead-wrong, but I'm going to stick with this same forecasting we've had since last November and I'll have to trade it accordingly and consistently...
Lets look at some key levels to keep an eye on:
Downside:
4429
4401
4384
4364
Upside:
4495
4512
4538
4554
For me, the plan is simple, short the rises unless price action dictates otherwise...
Early this morning Yeno gave those in our chat a killer EUR/USD short on a live trade call:
Click on Image
And I just have to give a big congrats to one of our community members who goes by the screename CK33 -- this smart and patient trader took the live trade call, shorted at 4636 and held his short all the way to 4445, picking a perfect bottom to close out and bank 191 pips... we love hearing those success stories!
Fundamentally tomorrow, we only have one noticeable piece of data which is German Industrial Production, which very likely could disappoint this go around...
As far as the market goes, I don't expect another 200 pip move tomorrow, but I'm ready for continued volatility should the market decide to stay active...
Currently, we are in a signal which will close out at 1.4513 should we stay above our last buy level of 1.4420... so far, we've held above this level... I feel confident this signal will payout just as all the others have... if this signal is making you squirm, find me in the chat so we can discuss it
I think that's all for now... see ya in the chat...
-FX Insights
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