As it turned out, Mario Draghi’s early comments yesterday sent the Euro soaring through the day. While much of his comments focused on the continued need for easing and remaining accommodative, his comments suggesting risks would move from deflationary to reflationary sent the single currency to fresh 12 month highs against USD, 15 month highs against the Yen and almost over 7 month highs against the Euro. That certainly places the Euro at an extremely bullish position for now and will leave to single currency vulnerable to any step back from the ECB.
The USD was under pressure across the board. The USD index now below the US Presidential election spike low and traded to near 8 month lows, levels not seen since early October, as that’s despite two rate hikes from the Fed in that time. Yesterday was one of risk aversion, yet the Yen faced heavy selling as well, while indices dropped with the Dax breaking to 12 month lows this morning after dropping .8% yesterday, S&P was down almost 1% yesterday while the Dow and Nasdaq both traded lower and set to face their first monthly decline in 7 months.
There are plenty of analysts out there suggesting Draghi’s comments have been misinterpreted and I’d certainly be in that bracket. He spoke more about additional easing than anything else and highlighted the importance and effectiveness of easing as well as remaining reactionary to changing markets. I certainly did not find him as hawkish as Euro pairs would suggest and I would not be too surprised to see some ECB commentary or “sources” stating markets have misinterpreted. That being said we must address the market that we see in front of us and this provides an excellent time for Euro sellers to buy USD, JPY, and GBP or place some cover in the form of hedges against the risk of the rate dropping back lower.
We certainly saw plenty of activity in that field yesterday and key levels to watch now are as follows. EURUSD will be looking towards 1.1428 area, while above there we enter into extremes and an area where EURUSD has found sellers up to 1.1600 for the last 3 years. 1.1230 and 1.1185 are areas where we’d expect some support to line up. EURGBP has broken aback above .8860/70 resistance and upside is now favored towards .9020. That being said, on both EURUSD and EURGBP some technical indicators are concerning, with negative divergence on showing suggesting the strength of the move higher for Euro is fading, indicating a pullback from highs may be imminent.
The dollar has been facing pressures as data has slipped and Fed speak has been less hawkish than in recent months. The USD index has now broken below several key supports and currently trades below the spike low during the US Presidential election. Growth projections for the US have been downgraded steadily through the year and despite better consumer confidence from the US yesterday, the greenback failed to have any traction.
Janet Yellen spoke yesterday evening in London and while giving little away on policy, did comment on the “frothy” valuations of US and global equity indices, as concerns grow markets are considerably overvalued and a bubble may be about to burst. Trade balance data headlines the US calendar this afternoon and is the only real opportunity for the dollar to get any reprieve for now. GBPUSD has been making to most of dollar weakness however, the pair appears to be looking to create a base above 1.2800 for now, upside likely limited to moves towards 1.3000, while a break back below 1.2800 should see support towards 1.2718 area.