Published June 12, 2014
Last week the ECB’s Mario Draghi again took unprecedented steps to weaken the Euro when he made bank deposit rates a negative -0.15%.
In addition to the rate changes he added an additional package of $400B LTROs as well as set the table for asset backed security purchases over the coming months.
Will these actions finally help the Euro fall in value after years of intervention?
The Market Reacts
The initial response by the markets on such inflationary practices was a counter-intuitive stronger Euro (FXE).
Actually, most of the ECB’s policy actions have sent the Euro stronger as was discussed with our subscribers and shown by the below chart the day before the Euro bottomed and rallied on the ECB’s announcement Thursday, June 5. We expected the Euro to rally on whatever news Draghi released.
The dashed vertical lines show that regardless what is announced by the ECB, the Euro’s trend often changes shortly afterward. The recent trend was a weakening Euro, which set the stage for a bounce in the currency on any ECB announcement.
Short Term Issues – Long Term Problems
But, any bounce is likely to be short lived as I first discussed back in April when the Euro was 2% higher, at $1.3763. The article I wrote, “Is the Euro about to Tank”, outlined some of the long term Euro trends I was watching then; today they are even more relevant.
The long term Euro spot chart included in that research piece is updated below and shows price continues to cooperate with our technical outlook of a weaker Euro.
After meeting both its long term downtrend and Fibonacci price resistance in March, prices have changed their trend and are resuming their longer term weakening trend, in place since 2008.
Still worse for Euro bulls and shown in the next short term chart, even with the customary ECB announcement bounce, the Euro hasn’t been able to take out its 200 day moving average.
This is very bearish price action, and if the ECB 6/5 announcement low at FXE $133.75 (Spot Euro $1.3550) can’t support price on this retest, it will open the door to much further downside.
What this shows is two things.
First, it means the ECB really is not in control of the Euro’s price. In the past they have loosened policy and the Euro has still strengthened. The recent announcement saw a similar result, but thus far only for a day, before technical resistance at the 200 day held prices in check.
The ECB has wanted the Euro to weaken for years, with their policies failing up until now. Just because it may happen to work now, does not mean it is because of their policies (IEV).
Secondly, the technicals continue to be the overwhelming force driving the Euro’s price (CCY:EURUSD=X). For four months now the Euro has tried to break out from its long term downtrend, unsuccessfully. Now that prices are rolling over, it is likely the downtrend is going to pick up in speed.
Does this mean Euro Zone inflation will finally pick up?
That remains to be seen, but unless Euro bond yields confirm by rising, it is unlikely the decline in the Euro will be inflation driven. Instead a declining Euro may be the result of continued weakness in the Euro Zone economy and/or an increase in macro risk.
We will be watching the Euro closely for a short entry as the weakening Euro trend suggested by the technicals should pick up steam. ETFs that take advantage of a weakening Euro are the ProShares Short Euro (EUFX), the MarketVectors Double Short (DRR), and the ProShares Ultra Short Euro (EUO).
The ETF Profit Strategy Newsletter researches the world’s markets to keep you ahead of the major trends. The Euro, like the U.S. Dollar, and Yen has been strengthening as demographics remain the key driver of those economies, but the Euro may finally be weakening, although not likely because of a pickup in inflation.