The selling of euro accelerated when Christine Lagarde started talking at the ECB press conference, after the central bank decided to keep monetary policy unchanged despite the resurgent coronavirus cases. The ECB’s President provided the clearest signal yet that more ECB stimulus was coming in December, and traders decided it was a good time to push their sell buttons. The shared currency dropped across the board, with the selling pressure accelerating as more and more support levels broke down. Stimulus hopes helped to lift the European indices off their lows. The sell-off in the EUR/USD lifted the dollar index, with the greenback also rising against other majors in response to positive data from the world’s largest economy as both GDP and jobless claims topping expectations.
Lagarde provided clearest hint of more stimulus
Lagarde said November is going to be a bad month for data due to the virus-related lockdowns and that the economy is losing momentum faster than expected. The resurgence of COVID is presenting renewed challenges to growth, and this presents uncertainty which is weighing on business investment. As a result, risks are clearly tilted to the downside and that inflation has been dampened by lower energy prices.
The ECB president confirmed that the Governing Council was in total agreement to the above analysis of the situation, and all agreed that it was necessary to take action. The Governing Council, she added, was already prepared to take action, and that it will not look at one single instrument, but will touch on all instruments. While Decembers is when all the action will likely take place, the ECB will not just sit and watch the wheels come off. According to Lagarde, in the meantime the central bank will use the entire PEPP flexibility to help offset the economic slowdown.
ALL instruments
So, the key takeaway point is that the ECB’s Lagarde has confirmed more easing is coming with recalibration of ALL instruments in December, and that the economy is expected to weaken amid virus-linked restrictions and lockdowns. Traders are thus left with little choice but to sell the euro.
EUR/USD hit by double whammy
The EUR/USD was dealt a double whammy of bearish news. First it was the ECB’s dovish assessment of the Eurozone economy and strong hints of more stimulus. Then there was the US GDP and jobless claims, both coming it better than expected. GDP grew at an annual rate of 33.1% compared with 32.0% expected, while jobless claims dipped to 751,000 in latest week vs. 778,000 expected. The stronger data helped to lift the greenback across the board, including against the single currency.
Path of least resistance to the downside
With the EUR/USD breaking support around the 1.17 handle, and in light of the above macro developments, the path of least resistance is now to the downside. We now favour looking for rallies to fade around resistance levels, such as the area shaded in the chart, which was formerly support. As things stand, rates are likely to drop below the September low of 1.1612 next, and potentially head towards the psychological level of 1.1500 next. Meanwhile for the bulls to come back in, we will need to see a higher high first. Until that condition is met, we are expecting to see more weakness in the days and possibly weeks to come.
Source: ThinkMarkets and TradigView.com