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Euro Drops to Fresh Lows as Draghi Fails To Impress

Last updated 12/8/2011 10:13 AM ET (GMT -5) 3 Comments

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Boris Schlossberg

Director of Currency Research, GFT

The EUR/USD dropped to fresh weekly lows despite the fact that the ECB lowered its benchmark rate and announced a series of non-standard measures to help ease credit conditions in the region. The pair hit a low of 1.3311 in morning North American trade after ECB President Mario Draghi refused to entertain the idea  of using the central bank as a lender of last resort stating that this was against its mandate.

The ECB lowered its benchmark rate  by 25bp to 1.00% although the decision was not unanimous  for only the second time in history. However, Mr. Draghi tried to reassure the market that the disagreement was only about the timing not the direction of the policy. The ECB also introduced a wide array of non-convectional programs that greatly expanded the the type of collateral that the central bank was willing to accept in an attempt to stimulate lending in the Eurozone.

However, by refusing to act as a backstop to the EZ sovereign debt market,  the ECB may have created the  worst of both worlds scenario by essentially lowering the credit quality of euro without providing any interest rate relief for the member nations. Little wonder then that euro was weaker not only against the dollar but against most of the majors as a result of today’s actions. The pair is geared to test its recent swing lows at 1.3260, but shorts may be hesitant to press their cause ahead of the EU summit tonight. Yet if EZ policymaker fail to produce a meaningful plan the pair could quickly tumble to 1.3000 on market disappointment.

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Comments (3)

mbrad77

December 08, 2011 at 12:10 PM ET

I'd like to add that the AUD/USD has gone through the same high volatility moves, accounting for a 200 pip swing in a matter of one hour. I'm more inclined totrade the JPY crosses at this point as they only experienced on average 100 pips moves (EUR/JPY and AUD/JPY)

Gogolando

December 08, 2011 at 07:58 PM ET

Boris, i thought that the EUR should have rallied a bit--giving their actions. Everyone new that they were going to lower intrest rates by 25bps. And being that they said that they were not going to QE, I thought that that would be EUR bullish. Why did the EUR fall like that on what seems to be Bullish news for the currency. Or is this more of a short term thing?

Darkdoji

December 09, 2011 at 03:08 AM ET

I think the focus was firmly on ECB's stance with respect to the debt crisis. Monetary policy per se did not weigh so much in the moves seen. The expectation was for a strong and clear ECB role in restoring market confidence on the back of (expected) clear political commitment by Euro member nations to tackle the rut. That did not come come through from Draghi's presser. I traded the AUD and strangely enough I just exited the "head fake" (on the assumption it was a top) and entered a new trade down precisely at the moment the market dropped. Now that was real luck in in market timing - "the hand of God" - but given the AUD's technical and fundamental character I will remain short the pair until about 0.9663 (especially if the summit ends without the expected outcome). The AUD is probably the most predictable pair of all but one must understand its fundamental drivers and technical character which are simple enough to do (with some effort). No more Euro for me (though the Euro drag is a key factor trading any risk sensitive pair).

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About The Author

Boris Schlossberg began his Wall Street trading career more than 20 years ago at Drexel Burhnam Lambert. There, he traded nearly every type of financial product on the market in the U.S., from equities and options to stock index futures and foreign exchange. His innate ability to analyze market information and use it to trade has helped him become an industry-recognized, “go to” trading professional.

These days, whenever the markets move, many organizations turn to Schlossberg for his take on the situation. He is a weekly contributor to CNBC's Squawk Box and a regular commentator for Bloomberg radio and television. His daily currency research is widely quoted by Reuters, Dow Jones and Agence France Presse newswires and appears in numerous newspapers worldwide. Schlossberg has written for publications like SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is also the author of Technical Analysis of the Currency Market and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Kathy Lien. He joined GFT in 2008.