After the big moves last week, it seemed that EUR/USD got comfortable in the old 1.3585 – 1.3650 range. Not any more: EUR/USD broke down below this support line and at the lows following the ECB announcement.
What is behind the drop? Here are 3 reasons:
- Getting ready for negative rates: The announcement of a negative deposit rate came on Thursday, June 5th, but the actual implementation is due tomorrow, June 11th. Yesterday was a bank holiday in most of Europe. Now that European markets are at full steam and that the due date is close, selling of euros seems quite timely.
- Low yields: Spanish 10 year bond yields stand at 2.58%. This is lower than US yields. Does this make sense? Probably not. In any case, investing in US yields is now more profitable than investing in not-so-safe and formerly high yields. Safer havens such German and French yields are digging the bottom, both well below 2%. Also Italian yields, at 2.71%, are not that far from US yields. At such levels, flows into the euro-zone might be coming to an end, and the market may begin realizing this.
- Ready to act: The main reason that the euro rebounded after Draghi laid out all the measures was that he basically shut the door on further rate cuts. The tweak in forward guidance backfired. However, ECB members have made it clear that more measures (notably QE) are firmly on the table. The last one to do so is the Finnish member Liikanen that clearly said “We are not done yet”. This is probably the straw that broke the camel’s back.
EUR/USD is trading at 1.3555 at the time of writing, 30 pips below support. The next line is close: 1.3550, and it is followed by the round number of 1.35 the pair tested during Draghi’s press conference.
For more lines, see the EURUSD forecast.
And here is the chart:
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