The euro-dollar is currently sitting on daily support, and euro bears are enjoying the taste of weakness. “The change has finally started to take place,” said Ian Stannard, head of European FX strategy at Morgan Stanley. The growing potential for more stimulus by the European Central Bank (ECB), combined with evidence of lessening demand for debt, is having a continued effect on price action.
According to Stannard, “when we see easing measures, it’s not just the initial impact of a potential rate cut, it’s going to be the asset market performance to those easing measures which will be the key to the euro.” Just the mention of central bank quantitative measures by ECB President Mario Draghi have sent the euro down 2.3 percent against the dollar since May 8.
Market participants are not particularly sure what Draghi will do during the next ECB meeting in June. However, the impact of another rate cut will doubtingly send the European currency lower. Easing will most likely deteriorate interest in peripheral debt, which could raise borrowing costs. BlackRock, the largest money manger in the world, said, in early May, that it cut holdings in Portuguese debt. Additionally, the Japanese Finance Ministry has data showing that investors sold ¥1.93 trillion worth of euro-dominated long-term debt this month.
“It’s time to sell euro-dollar,” said MacNeil Curry, technical strategist for Bank of America. EURUSD is testing support at 1.3645, as well as the daily 200 EMA. A close underneath this point will lead bears down to 1.3555/60. Price action resistance still is seen at 1.3700, which is likely to cap any rebounds north.
The impact of the ECB’s actions next month will send the euro-dollar to the third level of support on the daily, 1.3470, yet this will likely only be the continuation of a larger drop lower.