ECB Cuts – EUR/USD Trade Setup

Euro Zone is courting deflation and witnessing weak growth. Some talking heads on TV are wondering whether ECB President Draghi believes in data that inflation is not a threat. But on Thursday morning, ECB and President Draghi came out with blazing guns.

ECB has cut the deposit rate to -0.1% from 0.0%, effective from June 11, 2014.The negative rate is a first for a major central bank. The refinancing rate was lowered by 10 basis points to 0.15%, though the market was expecting a drop to 0.1%. The marginal facility interest rate was lowered by 35 basis points to 0.4%. This is the rate that the bank to borrow from the central bank.

Obviously, the negative rate is bearish for Euro and EUR/USD is showing it. The pair made a double top on May 8th (see point C in chart). Then on May 15th (point D) it broke below the intermediate bottom made on April 4th (point B) between the two tops – May 8th and March 13th (point A). The pair has been vacillating at the lower bound for the last couple of weeks waiting for the ECB to act. Today’s catalyst is a sign that the pattern is completed and the downward journey to the measured target is on.

The high on March 13th was 1.39668 and the low on April 4th was 1.36730 – a 293 PIP spread. This gives a measured target of 1.33792. Along the way there are few support levels that may break the drop. First support level is Feb 2nd low of 1.34773 (Sup 1 in chart). The next support level, Nov 7, 2013 low, of 1.32958 (Sup 2 in chart) may act as a target though it is below the measured target of the Double-Top pattern.



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