The Euro has corrected sharply over the past two trading weeks. Prior to the press conference held by European Central Bank President Mario Draghi two Thursday’s ago the EURUSD was trading a few pips away from the crucial 1.4000 level. The latest push to break this level came from expected inaction by the ECB. The EURUSD only reversed course after Draghi stated that the ECB would feel comfortable to act during its next policy meeting on June 5th.
The EURUSD sold off in excess of 400 pips after the announcement over the past 10 trading days, but the problem is that forex traders have already accounted for an interest rate cut between 10 basis points and 15 basis points. In addition market participants expect more action such as a negative deposit rate in addition to a stimulus package.
Since a rate cut is fully priced in on top of additional stimulus measures the Euro may rally sharply if the ECB fails to meet high expectations which at current predictions is a very likely event. Draghi’s comments were taken as a 100% guarantee that the ECB would act which is a very dangerous move to take. The biggest mistake is the hope for an economic stimulus package similar to other central banks which is a very unlikely event.
Several economic indicators point towards a Eurozone which is stabilizing and in several cases improving which means that the ECB has not rush to act. The ECB under Draghi has a tendency to surprise the markets with the latest evidence presented two weeks ago when Draghi’s words caused the 400 pips+ correction.
Forex traders should be prepared for a rally should the ECB cut interest rates as it is very unlikely for any further monetary policy action to be taken. The ECB has never bowed to market pressures or what traders expected from the ECB. In essence the ECB remains the only central bank which remained independent from markets and politics. Forex traders are advised to seek long entry opportunities in the EURUSD over the next few trading days.