The December Euro surged to the upside as expected when the European Central Bank announced it was cutting its benchmark interest rate by 25 basis points to 1.00, but then sold off as head central banker Mario Draghi failed to signal whether the ECB would step up its bond purchases. Traders decided to be cautious and liquidated positions ahead of Friday’s European summit.
Traders appear to be a little confused about what this means to the overall debt crisis picture. The recent Italian and Spanish bond purchases by the ECB have served as a way to control interest rates in these two countries. It also may have prevented interest rate spikes like those which took place in Greece. Although at times it seemed like the purchases weren’t working because auction rates were still rising, most traders agree that without them interest rates would have moved dramatically higher.
Daily December Euro Pattern. Price & Time
Since European banks were burned buying Greek bonds as encouraged by the central bank, all have shied away from the purchase of Italian and Spanish bonds. This created fear of an impending credit crisis until the ECB stepped in. The ECB is likely to continue to buy the bonds but this morning’s report doesn’t make it clear as to whether it will step up purchases or gradually step aside.
By backing away from increased debt purchases the ECB could be sending out two signals. The first signal is bearish since it would imply that it may be running low on funds. This would be especially true if it meant that the ECB was implying that it would not have the money to also bailout other sovereign nations such as Portugal or Ireland.
The second reason for curtailing the bond purchases could be that the action will be deemed unnecessary if the European Finance Ministers hammer out a long-term solution by Friday to solve the sovereign debt crisis. This is a real possibility since it is the last meeting of the year and they have received sufficient warning that something must be done now.
Realistically, traders are fed up with the way the EU policymakers have been conducting business this year. This is the main reason for this morning’s sell-off. Traders would rather err on the side of caution than get trapped on the long-side of the Euro if nothing is accomplished by the end of the week.
Technically, the short-term range is 1.3212 to 1.3550 with a retracement zone at 1.3381 to 1.3341. Since the market is on the weakside of this retracement zone, it has a bearish bias. The longer the market spends inside of this range, the greater the breakout potential. A breakout over 1.3550 is likely to mean a near-term test of 1.3772. A move through 1.3212 is likely to trigger an acceleration to the downside into the upper 1.2000 area.
