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Today we added to the EUR/USD via the etf FXE to our Real-Time Alerts on the long side. We view the cross trading oversold, and for good reason – nearly every polled economist according to Bloomberg thinks the ECB will issue some sort of easing program when it next meets on June 5th. This positioning is grounded in ECB President Mario Draghi’s shift in tone in the last meeting (on 5/8), suggesting the bank would act to address the low inflation and strong EUR/USD.  

Since that meeting, sentiment from policy makers towards action has only increased the speculation about the Bank’s willingness to issue both conventional and unconventional measures to counter low inflation and a strong common currency. What’s on the table?

  • Cutting the main interest rate (currently at 0.25%)
  • Cutting the deposit rate to negative (currently at 0.00%)
  • Issuing a new QE program

While it’s unclear if Draghi will in fact act and by which means (tools), our positioning is informed by the US Dollar Index trading below its long term TAIL line of resistance at $81.17 (currently at $80.39) according to our quantitative model. We’re buying these oversold levels ahead of the meeting, and note that despite such overwhelming sentiment that Draghi will act, he has shown time and again over recent years to hint, but ultimately keep policy tools in his back pocket until conditions worsen, and/or he believes he’s incapable of influence simply through rhetoric.  

After all, Draghi was successful in talking down the EUR/USD since his last meeting, when the cross was pushing $1.39.  His other challenge, the inflation rate, which currently stands at 0.7% in April Y/Y, will be much more challenging to influence rhetorically. 

Below we outline our quantitative levels for the EUR/USD. We’re keying off the TAIL line of $1.35. If price holds above this level (and the US Dollar remains broken on the TAIL duration), we’ll remain bullish. If the cross breaks this level (and the US Dollar overcomes its TAIL resistance level), look out below!

Enjoy your long weekend!

Buying the Euro (FXE) - zz. eurro

Matthew Hedrick