ECB drives EUR USD below 1 0600 but US data fails to extend the selloff

It’s been quite a busy morning for EUR/USD traders, despite the impending US holiday.

The fireworks kicked off at the start of today’s European session, when a report from Reuters revealed that ECB policymakers were weighing more unconventional monetary policy tweaks in an effort to stave off deflationary pressures in the Eurozone. The two specific policies that the ECB is reportedly mulling over include a two-tiered bank charge to help the (primarily German and French) banks that hold massive reserves with the central bank and purchasing lower quality bonds that would then be repackaged with the current high-quality assets and resold. In some ways, this plan seems eerily similar to the synthetic CDOs that facilitated the US mortgage boom less than a decade ago.

Boiling down all the complicated econo-babble to a more understandable level, Draghi and company are still very concerned with deflation in the Eurozone and are considering unprecedented actions to try to stimulate the economy. Some measure of easing from next week’s meeting is all but inevitable at this point, and there’s a chance that the ECB will be more dovish than many traders currently expect. Predictably, this pushed EUR/USD lower, and the pair is now trading at a fresh 7-month low under 1.0600.

Heading into today’s US session, there was a chance for US data to proverbially “kick EUR/USD while it was down” but the data did not come out unanimously bullish for the US economy. While some of the releases were better than anticipated (notably including initial unemployment claims at 260k and durable goods orders at 3.0% m/m), others missed expectations (including core PCE at 0.0% m/m and personal spending at only 0.1% m/m).

On balance, it still appears that the US economy can support a small increase in interest rates next month, and we still expect the dollar-bullish trend to extend further over the coming weeks. Bond traders agree, with the yield gap between 2-year German and US bonds hitting its widest levels since 2006 earlier today.

Technical view: EUR/USD

Turning our attention to the chart, EUR/USD is working on a potential Bearish Engulfing candle* at the top of its bearish channel, signaling a shift from buying to selling pressure and opening the door for another leg lower from here. Meanwhile, the RSI indicator is back in oversold territory, but as we often note, an oversold reading alone is not a strong reason to expect a reversal in a strongly trending market, and as long as the bearish channel holds, we will continue to favor more downside in EUR/USD toward strong support in the 1.0500 area.

*A Bearish Engulfing candle is formed when the candle breaks above the high of the previous time period before sellers step in and push rates down to close below the low of the previous time period. It indicates that the sellers have wrested control of the market from the buyers.