Unless you’ve been living under a rock, you know that traders are selling the euro aggressively after ECB President Mario Draghi hinted that the central bank may take actions as soon as next month to ward off deflation. Traders chose to “shoot first and ask questions later” on that headline, driving the EUR/USD down nearly 150 pips from the intraday peak in just an hour and a half. Draghi’s words also had a big spillover effect into other currency pairs like the EUR/JPY and USD/CHF, as we noted earlier today. However, the EUR/GBP may be testing the most significant level of all in the wake of Draghi’s press conference.
Looking first to the longer-term weekly chart, the EUR/GBP is pressing against a critical support level at .8160. This level represents the 61.8% Fibonacci retracement of the entire July 2012 – February 2013 rally, as well as a key previous support level (we initially mentioned this level over two months ago). Astute traders will also note that this level is also the topside of a previous bearish trend line; as always, previous resistance levels, once broken, tend to become reliable support levels.
At the same time, volatility is reaching historical lows. For example, the Average True Range indicator, one of the most basic measures of volatility, has dropped to just 98 pips, the lowest reading since late 2007. Confirming the ATR signal, the Bollinger Band width (standard settings) is at its lowest level in six years as well, creating a classic Bollinger Band “squeeze” setup. Because volatility is cyclical, periods of low volatility (like the current environment) tend to be followed by breakouts and periods of higher volatility and strong trends.