What’s Behind Euro Sell-Off?

The market also likes the drama.


Last Thursday, June 14 2018—Euro had many high impact news releases.


I did not have any position in Euro. I only had GbpUsd and UsdChf. Nonetheless, I still felt the need to learn what happened as it greatly affected my trades.


Given the news releases, I asked my financial analyst bro to discuss with me the connections and help me understand the fundamentals. Cause, if it isn’t obvious yet, I’m more of a technical trader.


So, here it goes...


The Technicals


Eur/Usd had just broken out the 1.220 level of its long-term sideways movement around April of this year. It decidedly triggered a sharp drop towards a strong support at around 1.164 to 1.149 level. The price had bounced towards 1.185 level. Then, a small sideways movement formed making 1.185 a potential resistance.


my technical take on EurUsd

On Thursday, the price hits the previous bar's high first testing the 1.185 assumed resistance. The price failed to break the resistance nor hold an upward momentum especially upon a lackluster news release. The Bears have engulfed taking over +200 pips bringing back the price to levels 1.164 and 1.149 retesting the strong support.


Read related article Price Action: Conquer by Engulfing


See why I like technicals? It's fast and easy.


Now, the Fundamentals… *dundundun*


The news release was about the Main Refinancing Rate followed by European Central Bank (ECB) Press Conference. Actual result greater than forecast has a good effect for the currency. However, upon the news release, actual result presented no change compared to the forecast.


from forexfactory.com

While a neutral result does not warrant a big Bearish movement (and greatly affecting other major currencies on top of that! huhu my trades), the market may have been disappointed with the Euro monetary policies.


Rooted way back from the 2008 Financial Crisis, several Euro member countries were shoved into debt to the point of defaulting. However, since the region has a collective currency, defaulting is not as easy. A country may have to break-up with the rest. The assembly does not want that.


Since then, the Euro has been making attempts to resuscitate the economy through monetary policies such as the Quantitative Easing (QE). ECB has been buying government bonds to increase money supply. A more sensible alternative than printing more money that would lead to devaluation.


Unfortunately, QE is ineffective when interest rate is already at 0.00% such as the Refinancing Rate result. This has been the rate since March 2016. The commercial banks are unlikely to lend out more money.


What's it gonna be for them anyway. Banks' income comes from interests, which has been basically zilch. And this would be the case until the rest of 2018 as ECB President Draghi plans to keep QE until then. Thus, financing businesses to jumpstart the economy is a struggle.


"At best, policies are only slowing down the drop."

Euro is already at the point of recession and declining further. The monetary policies are serving the ECB as a brake pedal. At best, policies are only slowing down the drop. The ECB delays it to be given more time to think of other methods.


See links:


Integration

These things happen simultaneously and is reflected almost instantaneously in the Forex chart. Well, the technicals and the fundamentals are in confluence.


At first, the market was anticipating the news. The Bulls rallied to test 1.185 level. But, the news result was disappointing urging the big players (institutions such as banks) to go the other way. Several Long traders were likely stopped-out or profit-taking. Nonetheless, the Bulls have exited gaining Bears more strength.


Then, the bandwagon began. Some to ride it, some to recuperate losses. Hence, the market overreaction. The downward momentum would likely to go on unless other majors opposite Euro (especially the US, which is doing fine so far) face deeper problems and give it time to breathe.


---


As for my affected trades, Gbp (British Pound) and Chf (Swiss Franc) are close trading partners of Euro. Obviously, they are all in the same region. Now I know why Gbp wants to Brexit.


Gbp also had news at the time. But, the good news was flushed down the drain by that Euro situation. There's this saying that you're the average of the five people you're with. Yep, Gbp is being dragged down.


Blaming aside, I probably missed drawing such resistance level.

Oh well, that’s #ForexLife.


Happy trading everyone!

Sincerely,

@marilesaca || Trading Kitten :3


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