05/02/2015: Is a short euro trade such a sure thing?

With the ECB set to fill in the blanks over its €1.1 trillion quantitative easing programme the euro has dropped to a new low dating back to August 2003. Being short the euro has been a popular, and in many ways crowded, trade in the past 9 months. But in a similar way, the market has been right. Since the ECB announced at its May 2014 press conference that it was considering additional easing measures, the euro has dropped from $1.3992 and lost 2900 pips, or over a fifth of its value. Is there room for more downside after today’s meeting? Or will it be a case of “sell on rumour, buy on fact”?


The ECB is ready to flood the market with liquidity. Whilst the Federal Reserve is well down the road towards tightening, the ECB stands on the brink of a programme that will pump at least €1.1 trillion into the Eurozone economy over the next 18 months at a rate of €60bn per month. We will find out today the composition of purchases (which bonds), the timing (likely to begin on 9th March according to sources), and the lower threshold at which the ECB is willing to buy into negative yield (potentially around 20 basis points negative).


The euro was sold off by around 100 pips yesterday and is a further 30 pips lower today in front of the meeting. The key low of $1.1098 has been breached and the following downside levels could now be on:

  • $1.1000 is the next psychological level
  • $1.0967 is the 38.2% Fibonacci projection of the $1.2569 to $1.1098 sell off projected from $1.1532
  • $1.0792 is the 50% Fibonacci projection of the $1.2569 to $1.1098 sell off projected from $1.1532
  • $1.0617 is the 61.8% Fibonacci projection of the $1.2569 to $1.1098 sell off projected from $1.1532

Technically, the daily momentum indicators suggest there is further downside potential with the current move, with the RSI at 27 (got down to 17 in the January sell-off), and the MACD lines have only just bearishly crossed over. However the volume has been deteriorating and is failing to really back up the recent downside break. Yesterday’s volume was the 4th lowest of the year on the big downside move. That suggests that there could be a lack of willingness to back the break.

EUR vol

Can Mario Draghi come out with anything that would persuade markets to sell-off the euro even further than it already has? Potential surprises could come with a hard-line approach taken with Greece over the waiver on its collateral. If the ECB remains steadfast, then this could create a flight to safety away from the euro, pushing it lower. I remain of the belief that the Eurozone is a political project rather than an economic project, whilst the Greeks recently giving so much ground to secure the bailout extension could also mean the ECB is easier on them. I see this as euro supportive if this is the case.

I am also interested in the fact that the ECB staff projections are made today. The last projections were made on an assumption of oil trading around $85 and an exchange rate of $1.3000. Both of these will need to be substantially reduced and if this is the case this will be supportive of growth forecasts, which again is euro supportive.

Ultimately, I see the longer term outlook still very weak on the euro and further downside is likely in due course. However the reaction to the meeting could be positive and give the euro a technical rally. I would then be looking to use a technical rally as a chance to sell in the coming days but there is scope for a near term bounce. My ideal sell-zone is now $1.1100/$1.1250.

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