ECB President Mario Draghi has said for months that the euro is too high. Today's violent surge and reversal during his press conference had more to do with the currency's failure at 1.4000 and subsequent long liquidation than any fear that the ECB is about to act to diminish euro strength.
As expected ECB rate policy was unchanged. The main-refinance rate remained at 0.25 percent, the marginal lending facility at 0.75 percent and deposit facility at zero. There were no new liquidity measures.
As Mr. Draghi began his news conference at 8:30 am Eastern Time the euro quickly ratcheted higher. In three minutes it ran from 1.3937 to 1.3988. Then it paused, trading between 1.3969 and 1.3993 for 20 minutes.
The unwillingness of the market to challenge 1.4000 was telling. The euro has not been through that level in more than two and a half years (October 31, 2011) yet there was no pressure to take it higher.
While traders may have been wary of stops above 1.4000, it shortly became clear in the the back and forth around 1.3990 that there were none. Had there been any stops above the figure their pull after such a violent burst higher would have been irresistible. Instead it was the accumulated long positions that were soon liquidated.
The euro had been essentially static for almost a month (4/9- 5/5), ranging between 1.3800 and 1.3900 before breaking 1.3900 on Tuesday. The long positions gathered in those weeks had to be targeting a break above 1.4000.
The stop loss trigger on the fall was likely 1.3967, the high (3/13/14) since October 2011. But most of the stops must have been situated well below there for the simple reason that, unless they were trailing stops activated by the run above 1.3970 today, the market had spent very little time above 1.3950. The bulk of the stops were between 1.3940 and 1.3910. The hard selling pressure dissipated at 1.3900 though the market continued to move lower in small fits until grounding at 1.3860.
Neither the recent nor longer term euro uptrends have been broken by today’s action. The shorter trend stems from early April and its support marked today’s low at 1.3840. Given the violence of today’s move it is unlikely to be strong and should give way when challenged.
The longer trend goes back to late July and its support between 1.3790 and 1.3800, angling higher as time passes, is much more substantial.
The euro has paused, it has not yet broken.
Chief Market Strategist
WorldWideMarkets Online Trading