For once, the marquee trading event of the week lived up to the hype. In its much-anticipated monetary policy meeting, the European Central Bank chose to cut its official interest rate to record lows and became the first major central bank to take deposit rates negative, meaning that banks now must pay to deposit their funds with the ECB.
While much of this bold action had already been priced in by the market, the fireworks truly took off during ECB President Draghi’s press conference. Once he took the podium, Draghi laid out a litany of stimulatory measures and statements:
- “Targeted” Long-Term Refinancing Operations (TLTRO)
- Ending Sterilization of bond purchases
- Downgraded economic growth forecasts to 1% in 2014 (from 1.2% previously)
- Downgraded inflation forecasts to 0.7% this year and 1.1% next year (from 1.0% and 1.3% respectively)
- Stated that the ECB has not finished easing yet
- Suggested a large scale asset purchase program (QE) may also be on the horizon
This laundry list of measures exceeded the expectations of all but the most ardent euro bears, and the EUR/USD collapsed over 100 pips to test the 1.3500 level as a result. While rates have bounced back to 1.3540 as we go to press, the pair may now find resistance near last week’s lows at 1.3585 moving forward.
In the short term, the euro’s weakness may be played out, especially as traders start to look ahead to tomorrow’s always-impactful NFP report (stay tuned for our full NFP preview later today), but now is the time to start evaluating the pin action,” or side effects, of Draghi’s dovishness. One of the most direct impacts of today’s actions may be on the typically-staid EUR/CHF pair, which has been consolidating within a few hundred pips of the SNB’s 1.20 floor for nearly three years now.
With the ECB enacting negative deposit rates, there is a risk that funds could flee across the border to Switzerland, putting the 1.20 floor under pressure in the days and weeks to come. This could force the SNB to follow the ECB down the rabbit hole to negative rates in order to limit the strength in the Swiss franc. Therefore, the Swiss National Bank meeting two weeks from today (June 19th) will be absolutely critical, especially if we see the EUR/CHF tick down toward 1.20.
Speaking of the EUR/CHF, the pair has been consolidating within a symmetrical triangle pattern for nearly four months now, so the risks of a breakout and strong move are growing. Meanwhile the MACD has begun to roll over and is approaching the “0” level, suggesting that the momentum may be shifting in favor of the bears. If we do see a downside break, the next major level of support will be the lows from early 2013 and earlier this year in the 1.2100-30 zone. Though not favored at this point, a topside breakout in the days to come may expose previous resistance at 1.2250 next.