Euro under heavy pressure after rate cut, ahead of today’s US Jobs/NFP by Jim Langlands

The Euro fell like a stone after the ECB surprised the market by cutting interest rates by another 10 bps, to a new record low of 0.05%, while also lowering the deposit rate further into negative territory, to -0.20%. Mario Draghi then announced at the press conference that the ECB will start buying a broad portfolio of asset backed securities and covered bonds in October, greatly increasing the size of the balance sheet.

Elsewhere, the US ISM Non Manufacturing figure was strong, and dollar supportive, but in the scheme of things went almost unnoticed, as did the US ADP jobs number which underwhelmed at 204k (exp +210K), while the initial jobless claims rose slightly to 302k (exp 298k), and the market will now turn its focus to the US Jobs and Non Farm later in the session (exp 6.1%, +225K).

If the NFP is a strong number, as some economists are suggesting, then we are going to see the dollar resume its broad bull trend and will again put the Euro under heavy pressure.

Technically, the Euro is now heavily oversold in the short term and, personally, I have lightened up my own short position in order to resell in to any strength that we may see as they unwind.

Having broken below 1.3000 after Draghi’s statement, we are now in territory last seen 12 months ago. While the shorter term charts could provoke a bit of a short squeeze, especially if the NFP fails to live up to expectations, the longer term trend now looks set to head towards the major rising trend support  at around 1.2780 (monthly chart, from July 2001 – see below), which comes just ahead of the 9 July 2013 low at 1.2754. Ahead of that we should see some decent support at around the day’s lows, where the major Fibo extension sits at the 161.8% projection of 1.3993 to 1.3502, from 1.3700 at 1.2906.

On the topside, any rally back towards 1.3000 now appears to be a sell. If the NFP is poor though, we could see a larger run to the topside given the heavily weighted – short Euro – nature of the market. Above 1.3000, there is not a whole lot to stop it heading back to the daily Tenkan at 1.3070 and then on to 1.3100. I would be very surprised to see it up here, and it would really only be by dint of heavy short covering if we were to, in which case it would be another sell opportunity, for the lower levels to come in the days/weeks ahead.

Economic data highlights will include:

German Industrial Production, EUGDP, US Unemployment/ NFP, Consumer Credit