So far the, in June the currency market has seen quite a few high-magnitude events. First was the ECB’s decision to cut the deposit rate to -0.1% from 0.0% on June 5th to counter the deflationary pressures in Euro Zone. No major central bank ever had a negative rate. ECB also reduced the Minimum Bid Rate to 0.15% from 0.25%. Next was RBNZ’s rate hike on June 11th from 3.00% to 3.25%, mainly to contain the inflation and expectations. Then on June 12th, speaking at the annual Mansion House dinner, BoE Governor Mark Carney said that the rate increase could happen sooner that markets currently expect. Also, the US retail sales and PPI numbers came below the consensus estimates indicating that the inflation is nowhere to be seen.
Now let’s review the impact on currency pairs – particularly on Euro.
ECB’s action is generally bearish for the joint currency. It is also a signal that the risk is on again, which is bullish for the market. The knee-jerk reaction to the announcement on June 5th was a initial drop in EUR/USD to a low of 1.35032. Then the risk off sentiments, profit taking and resultant short squeeze turned the pair around and took it to up. Market took few days to digest the news and the pair gradually started to drift lower.
EUR/USD Feeling The Pressure
There are conflicting pressures on EUR/USD. ECB’s decision is bearish. US data says that strength in US dollar is not imminent. The risk-off signals is generally bullish for the pair. So the direction of move is not crystal clear.
On weekly chart, EUR/USD has been on an uptrend since making a low in the week of July 23rd, 2012 (see point A on weekly chart). The low coincided with the Trend Channel Line Overshoot (TCLOS), a bullish pattern.
Then during the week of May 5th, 2014, it made a bearish Trend Channel Line overshoot (point B). As of this week’s close, EUR/USD is hovering above the support line made by 2014’s lows of 1.34773 (line C).it is also above the uptrend line (D in chart), hence technically the uptrend is continuing. But if the 2014’s low and uptrend line support break then the October 2012 high of 1.3140 (line E) come in picture followed by the July 2013 lows of 1.2755 (line F).
The daily chart gives little bit more clarity. Between March and May 2014, EUR/USD made a double-top (line A) above 1.3990. In late May, it broke below the intermediate low of 1.3673, made on April 4th. The support became the resistance. The up move after the ECB’s decision on June 5th could not clear this resistance. Thus the double-top measure target is still in play – line G – near 1.3370.
The differences in the direction of rate-decision by ECB and RBNZ create opportunities for carry trade. The pair had been feeling the downward pressure ever since it made a top in August 2013. After falling lows in November, it again tried to run up but faltered by the end of 2013. The downward started in 2014 picked up another leg in June.
Between end of March and June, EUR/NZD made a horizontal channel. The twin announcements by two central banks forced the downward break of the channel. The measured target is near 1.5330 levels – almost 300 PIPs below current levels.
Both of these pairs offer good opportunities. EUR/USD is more liquid but its move is also less certain. EUR/NZD is not as liquid but the downward pressure on it is more certain.
The aggressive stop level in EUR/NZD would be near 1.5950 and the conservative stop would be near 1.6250. The all time low for it is 1.49688 made in August 201, 100 PIP above it is another support level. The measured target is 1.5330. Any of these could be the profit taking targets.
The aggressive stop for EUR/USD is near 1.3600 ad the conservative stop is above 1.3680. The first target is near 1.3475, next one is near 1.3350.