The euro experienced a rather sharp downward move in May. In the currency world, the two-and-a-half-percent decline (from early in the month until the trough two sessions ago) in a span of 15 sessions is big. When FXE began to come under pressure, technicals were already overbought, even as market participants began to position themselves for what might come out of the ECB meeting later this week. Euro zone inflation has been below one percent for several months now. Leading up to the meeting, ECB President Mario Draghi has dropped enough hints that monetary policy can/will be loosened in a variety of ways. At the policy meeting last month, Draghi said he would be comfortable with acting this month if needed. Some policy easing is expected to come out of the meeting.
The market is convinced that Draghi would act. The big question is, would the Bundesbank go along? Even assuming the German central bank gives the nod, the next question is, would the ECB be bold enough? A lack thereof – read timid ECB – could end up tightening monetary conditions. For now, however, some level of easing has already been priced in.
This fact is beginning to get reflected in FXE’s chart.
For the last several sessions, the duel between bears and bulls is about even. Near-term, indicators are grossly oversold. In the accompanying daily chart, it looks like FXE has fallen out of a wedge formation, but that can vary depending on where the trendline is drawn. On a monthly chart (not shown here), FXE has been nicely trapped in an ascending channel since mid-2012, and is currently sitting right at the bottom of that. Ideally, should there be a bounce, this is a perfect place to do so. Longer-term indicators are still grossly overbought, but in the near-term there are indications that sellers are exhausted/buyers are stepping in. Hence, regardless the ECB obliges the market or not, odds have probably grown that the near-term direction of the euro is up. If Draghi acts, then there likely will be a ‘buy the rumor, sell the news’ reaction. If he does not act, then that will probably set off an unwinding of the bearish positions that have been built over the past several weeks. Over at the futures land, large speculators are now net short Euro; the shift from net long to net short has come in a quick fashion. Longer-term, FXE has a lot lower to go before the overbought conditions it is in are completely unwound, but in the near-term odds of a bounce have grown.
