Last week, 2 major central banks slashed their interest rates by 25 basis points each.
The Reserve Bank of Australia was the first to act, cutting rates from 4.75% to 4.5%. This was followed 2 days later by new ECB chief, Mario Draghi, who surprised everyone by cutting rates from 1.5% to 1.25%.
Rate cuts are normally announced when central banks see that growth prospects are weakening. It was all the more surprising for the ECB, as maintaining price stability is their number one priority. However, inflation is expected to fall in the Eurozone over the next few months.
This caused Draghi to cut rates and focus on staving off a recession instead.
Although the ECB slashed rates, the price action for EUR/USD has remained largely volatile, swinging from optimism to pessimism fairly quickly. The mood swings tell us that traders were pricing in several events in the Forex Markets.
The initial euphoria was caused because Greek Prime Minister George abolished the referendum on the EU deal he initially planned for. This could put the country back on track to receiving its aid payment as part of the original bailout package.
At this stage, any news that leads to the release of aid for Greece is taken as positive for the markets.
The pessimism on the other hand, was caused by Italy. Traders have been acutely aware that Italian 10 year bonds have been trading above 6% for several weeks now. Its 6.35% yield starkly contrasts to Germany’s 1.82% and is dangerously close to the 7.82% recorded in Ireland – a country already on the bailout list.
Italy is the world’s fourth largest issuer of debt and faces more than 300 billion in refinancing in 2012 which could add nearly 11 billion Euros in additional interest rate expense for the country.
As part of the G20 developments last week, Italy has agreed to allow the IMF and a team from the European Commission to monitor their austerity efforts.
This week, the Greek Prime Minister has also agreed to step down. The decision was reached after a meeting between Papandreou,main opposition leader Antonis Samaras and President Carolos Papoulias. Political leaders will also meet this week to form a new unity government and end the political crisis.
With so much uncertainty surrounding the Euro, one thing is certain for the price action of EUR/USD – increased volatility.
Trade Call
Short EUR/USD at 1.3695
On the hourly chart for EUR/USD, a classic bearish flag pattern is spotted within the channels of 1st Nov to 7th Nov.
Since the momentum is down, our bias is to the short side. An entry is taken once prices break below the lower border of the channel. Our entry is taken at 1.3695, and a protective stop is placed 80 pips above the entry price. We will have 2 targets on this trade, and exit the final position at 1.3535.
Entry Price = 1.3695
Stop Loss = 1.3775
1st Profit = 1.3615
2nd Profit = 1.3535
