The decision of the European Central Bank led, as expected from the fx options market, to huge volatility in the EUR/USD pair and other markets related to the main currency pair. Consequently, what we observe in the chart can be interpreted as the bullish reversal day.
The ECB decided to lower the deposit rate by 10 basis points from -0.4 to -0.5 percent, in line with market consensus and introduce a EUR 20 billion QE program. The market expected 30 billion a month, but with a time limit, but got 20 billion open-ended quantitative easing program, which can last months or years. In the first reaction, the EUR/USD exchange rate fell towards this year's low, after the decision and after lowering the projection for inflation and economic growth. It was only at the very end of the conference that the EUR/USD increased significantly, creating a double bottom and a powerful formation outside bar.
The stimulus for an increase in the euro exchange rate was supposed to be a statement by Mario Draghi, who pointed out that the probability of recession is low and that decision makers will not seek to devalue the euro in order to achieve a competitive advantage, which Donald Trump accused the ECB immediately after the decision. In addition, the comment that fiscal policy should become the main instrument for stimulating the euro area could have an impact on the euro strengthening, which may indicate further limited activity of the ECB. It is also worth remembering that representatives of the main eurozone economies at the ECB were against the restart of QE, which may also affect the sustainability of this program under Christine Lagarde's leadership.
EUR/USD daily chart. Source: Conotoxia trading platform
The double bottom formation and the outside bar formation appeared on the EUR/USD chart. This are a trend reversal patterns according to the technical analysis. A better confirmation of this assumption will be a breakout of the downward trend line, to which the market is now approaching. If it is defeated, then the EUR/USD may rise toward 1.1200 or even the trend could change for longer, because now the market is waiting for monetary easing by the Fed after the ECB did what it could.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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