The ECB Sent the Market Swinging and We Went Swinging with It – Weekly Analysis 5 – 11 November

Posted Monday, December 12, 2016 by
Skerdian Meta • 6 min read

November was a hectic month with plenty of price action – albeit with low volatility since the market was one-sided. Apart from a 200 pip decline before the US elections, the market was all aboard the northbound USD train.  

The US presidential elections and the OPEC meeting were the biggest events last month. In fact, talks about production cuts are still ongoing between OPEC and non-OPEC oil producers even this weekend. The chances are that they will reach an agreement soon.

The three most important forex events for December were always going to be the Italian constitutional referendum, the ECB meeting, and the FED meeting. The FED is scheduled to take centre stage next Wednesday, and so the other two events grabbed all the attention this week.

The Italian referendum took place last weekend and it turned out that Italy has fallen out of love with its sweetheart Mateo Renzi. He lost the referendum and resigned in the following days, which means that the EU is short of a strong ally now. We saw a strange response in the Euro which means that the downtrend is limited, as we will explain further in this weekly review.

But the most important forex event was the ECB meeting on Thursday. There were many assumptions regarding the ECB monetary path considering the recent economic improvement, but the master of tricks, Draghi, did it again. He pulled the rag beneath the feet of EUR/USD bulls and left them all empty handed.


I´m still in the game

In my opinion, EUR/USD will finally break the 1.05 support level this time, since it has been banging its head against this level for a long time now. If it doesn´t, I´m literally going to eat my hat on a bet I placed with a colleague. So, have some empathy guys and keep selling EUR/USD if you don´t want to see me choking.

Nonetheless, that Euro jump just before the Draghster was enough to make us more than a hundred pips. The volatility really elevated this week so it wasn´t easy, but we made it through with a nice 126 pip profit.  

Forex Signals

The first half of this week was sort of unexpected, and we went through some rough times during the first 2-3 days. The Italian PM Renzi lost the referendum which meant that he is history in Italian politics now. That would normally be a negative turn for the Euro, but after an initial tumble, the Euro pairs reversed, topping around 370 pips higher.

To be honest, same as many forex analysts, I didn´t see that coming. This reminds me of the time when the market didn´t see the USD strength coming after Drumpf´s win. We were waiting for this Euro retrace to be over any minute but it kept crawling up until Thursday when the president of the ECB (European Central Bank) turned the market upside down once more.

Draghi is notorious for these sort of unexpected market turnarounds, but for some reason, he tends to bring out the best of us during these times. This was another one of those occasions as we grabbed nearly 200 pips from during his speech.

We opened a short-term buy forex signal in EUR/USD a few minutes before the ECB meeting, which hit take profit as the Euro spiked higher. At the same time, our long-term EUR/CHF signal that we opened a couple of weeks ago climbed higher as well.

The price was just below 1.09 when we finally made our mind up and called it a day for this forex signal. There was potential for the price to reach 1.10 and extend our profit, but the dovish tone in the ECB statement and in Draghi´s comments were more than enough to change our mind and settle for 170 pips.


This surge was enough to grant us 170 pips

So, Thursday was our best day by far as we made about 199 pips, but the drawdown from the previous trading sessions reduced our profit to 128 profit, which is considerable nonetheless. Too bad we missed a great opportunity to sell the Euro on Thursday when it peaked, but the reverse was so quick that my broker kept requoting me. Still, we had a pretty good week regarding the performance of our forex signals.  

The market this week

Following the market sentiment after the US elections last month, the USD started this week all bright and shiny. The failure of the Italians to set up a useful constitution when they voted against constitutional changes gave the Buck another boost as EUR/USD got as close to the big 1.05 support level as it could.

But, all of a sudden the market sentiment changed dramatically for no reason. The 1.05 level held once again and this forex pair started climbing up. What I think happened in the next few hours is that EUR/USD sellers got cold feet after the support held and they closed their sell positions which have probably been opened when EUR/USD was hanging around 1.11-12 before US elections.

So, the Italian referendum failed, one of the biggest EU supporters is out of his job, but instead of losing its feet the Euro lost its head and went against all fundamentals this week. Short covering happens very quickly and it is very ferocious; it pushes the price in one direction with almost no retraces, thus taking no prisoners.

Well, that lasted until Thursday when the time for the ECB finally arrived. The Eurozone economy is still a long way away from prosperous times everyone would love, but recently the economic recovery has accelerated and the rumors and assumptions that the ECB might tighten the monetary policy have been growing.

So, maybe this was partly responsible for the latest Euro rally. But all the good times come to an end and Draghi loves to kill the hopes of Euro bulls. He came on, delivered his blow and left, sending the Euro back down to the lows.

The ECB extended the QE (quantitative easing) programme until December 2017 at least, although the monthly purchases will be around 60 billion Euros a month. Still, the amount is higher than previously assumed. The ECB admitted that it will take some time to reach the 2% inflation target, which means that QE might even stretch beyond 2017. That´s pretty dovish and the picture in EUR/USD looks dovish too, so 1.05 here we come.

By the way, OPEC and non-OPEC meetings are continuing and by the look of it a deal between the two parties will be reached soon. But as I said last week, they rarely abide by their own rules so it might end up being a big farce.     

Economic data

Although the forex market was totally concentrated on the outcome of the Italian referendum and on the EUR/USD price action on Monday, the economic data that day caught my attention. The Eurozone retail sales and services PMI confirmed the EU economic recovery. The German factory orders, on the other hand, were amazing as they jumped nearly 5%.  

We can say the same for the US economic data this week; apart from the US trade balance, all other data releases beat the expectations. The US non-manufacturing PMI and the revised labour unit (wages) jumped higher, unemployment claims remained low, while the economic optimism and consumer sentiment beat expectations, too.

The UK economic data was sort of a mixed bag this month with services figures moving higher again, while the manufacturing and industrial production dived again. Another thing which caught my attention this week was the jump in Chinese inflation numbers. This is the first time that both CPI (consumer price index) and PPI (producer price index) move above 2%, which is another strong signal that inflation is picking up in a global scale.  

Pair analysis

We took a look at USD/JPY on Friday right before the price finally cracked the 115 level. Now that it is gone the picture becomes more one-sided. The 100 simple moving average (100 SMA) came just below there so that makes the picture pretty bullish.

But, not just yet, though. About 50 pips above there, another band or resistance begins which stretches all the way up to 116. To me, this is another one of the big resistance levels; they are 105, 110, 115, 115.50-116, 120 and 126 which is the top last year.  


We´re approaching another big level here

Therefore, USD/JPY buyers are not all clear until they manage to close a daily candlestick above 116. Besides that, the 20 simple moving average on the monthly USD/JPY chart is not far from where we stand right now and as you can see from the chart history it hasn´t always worked exactly to the pip. That means that the price is well within the influence area of this moving average, which might reverse the price.

That said, the global market sentiment is quite positive at the moment and I don´t see anything changing it in the coming weeks or months. Safe-haven currencies always suffer when the risk appetite is high in the forex market, so buyers bear in mind and sellers beware, at least until a conflict surges in the Middle East or a nuclear power plant busts in Japan.  


The 20 SMA is not out of the picture yet

Week in Conclusion

There goes the first week of December; we managed to make it through another hectic week with the failing Italian referendum which sent the Euro down. But the market had other things in its mind and took it nearly 400 pips higher, only for it to be slapped down by the one and only, Mario Draghi.

Next week is another big week in forex. The FED will hold the meeting on Wednesday and I can confidently say that there is no one whatsoever who doesn´t think that the interest rates will be hiked this week. I expect more volatility ahead but I hope that you have another successful week and we´ll be here for that.


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