Last week the ECB's Mario Draghi again took unprecedented steps
to weaken the Euro when he made bank deposit rates a negative
In addition to the rate changes he added an additional package
of $400B LTROs as well as set the table for asset backed security
purchases over the coming months.
Will these actions finally help the Euro fall in value after
years of intervention?
The Market Reacts
The initial response by the markets on such inflationary
practices was a counter-intuitive stronger Euro (NYSEARCA:FXE).
Strength Helps You to Spot Profitable ETF Trades
Actually, most of the ECB's policy actions have sent the Euro
stronger as was discussed with our subscribers and shown by the
below chart the day before the Euro bottomed and rallied on the
ECB's announcement Thursday, June 5. We expected the Euro to
rally on whatever news Draghi released.
The dashed vertical lines show that regardless what is announced
by the ECB, the Euro's trend often changes shortly afterward.
The recent trend was a weakening Euro, which set the stage for a
bounce in the currency on any ECB announcement.
Short Term Issues - Long Term Problems
But, any bounce is likely to be short lived as I first discussed
back in April when the Euro was 2% higher, at $1.3763. The
article I wrote, "
Is the Euro about to Tank
", outlined some of the long term Euro trends I was watching then;
today they are even more relevant.
The long term Euro spot chart included in that research piece is
updated below and shows price continues to cooperate with our
technical outlook of a weaker Euro.
After meeting both its long term downtrend and Fibonacci price
resistance in March, prices have changed their trend and are
resuming their longer term weakening trend, in place since
Still worse for Euro bulls and shown in the next short term
chart, even with the customary ECB announcement bounce, the Euro
hasn't been able to take out its 200 day moving average.
This is very bearish price action, and if the ECB 6/5
announcement low at FXE $133.75 (Spot Euro $1.3550) can't support
price on this retest, it will open the door to much further
What this shows is two things.
First, it means the ECB really is not in control of the Euro's
price. In the past they have loosened policy and the Euro has
still strengthened. The recent announcement saw a similar
result, but thus far only for a day, before technical resistance at
the 200 day held prices in check.
The ECB has wanted the Euro to weaken for years, with their
policies failing up until now. Just because it may happen to
work now, does not mean it is because of their policies
Secondly, the technicals continue to be the overwhelming force
driving the Euro's price (CCY:EURUSD=X). For four months now
the Euro has tried to break out from its long term downtrend,
unsuccessfully. Now that prices are rolling over, it is
likely the downtrend is going to pick up in speed.
Does this mean Euro Zone inflation will finally pick up?
That remains to be seen, but unless Euro bond yields confirm by
rising, it is unlikely the decline in the Euro will be inflation
driven. Instead a declining Euro may be the result of
continued weakness in the Euro Zone economy and/or an increase in
We will be watching the Euro closely for a short entry as the
weakening Euro trend suggested by the technicals should pick up
steam. ETFs that take advantage of a weakening Euro are the
ProShares Short Euro (NYSEARCA:EUFX), the MarketVectors Double
Short (NYSEARCA:DRR), and the ProShares Ultra Short Euro
Profit Strategy Newsletter
researches the world's markets to keep you ahead of the major
trends. The Euro, like the U.S. Dollar, and Yen has been
strengthening as demographics remain the key driver of those
economies, but the Euro may finally be weakening, although not
likely because of a pickup in inflation.
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