ECB doves cry, EUR/USD tanks but bears should be wary

The ECB revealed their dovish tendencies today, earlier than most pundits expected. LTRO 3 was announced, details to come later. Growth forecasts and inflation forecasts were lowered and the ECB assert they’re on hold until “at least” March 2021. Mario Draghi cited the recent weakening in EZ economic data predicting “a sizeable moderation of economic expansion will extend into the current year.”

Draghi also observed uncertain geopolitics, vulnerabilities in EM leaving marks on EZ economic confidence and uncertainty over projected US and China growth rates. All this and “muted underlying inflationary pressures” have prompted the ECB to clarify forward guidance, another round of long term LTROs and continued reinvestment of maturing bond investments until March 2021. Insurance against a congested EZ bank loan maturity calendar as well as Brexit consequences and US and China trade negotiations.

EUR/USD plunged below 1.1200 and Bunds rallied, whilst European bank stocks got hammered and equity markets both sides of the pond ceded ground. EUR/USD hit 1.1175 session lows and has traded sideways with an upward bias in Asia. What’s happening is that long term and short term moving average metrics are conspiring to stall the sell off. Our proprietary M/A and Bollinger Band moving average model reveals oversold conditions from 24-hrs to 200 days are oversold between 1.1275 – 1.1175 and heavily oversold between 1.1235-1.1050 with M/As out to 110 days heavily oversold at 1.1180.

Bollinger Bands expand and contract with volatility yet despite that all of the primary moving averages are flashing red oversold levels at -2.0 and heavily oversold at 1.1180. Neither short term or long term oversold levels can sustain much more with out either a price pullback or some sideways trading.

Analysis of the primary EUR/USD currency cycle (15-16 week M/A) reveals that we’re at the most oversold levels since November 2016. It took another 5 weeks and 2.3 big figs to find a base BUT that was the cycle low and EUR/USD rallied 22 big figs from that low. We don’t believe EUR/USD has that propensity this time around but we do believe it will be very hard to break much lower due to the mathematical bonds trapped around both short and long term M/As in the near term that will restrict downside penetration.

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