EUR/USD is currently trading at 1.0650, the lowest levels since December 2015. The pair extended its falls as US data was good enough to support a rate hike and so were Yellen’s words. While the Fed Chair did not promise a rate hike in December outright and was relatively cautious, she gave a thick enough hint. By saying that it will be appropriate to raise rates relatively soon, the door is now wide open to a hike in the anniversary of the previous one.
The focus belonged to the greenback but quickly shifts to the other side of the equation. Mario Draghi speaks tomorrow. Yellen’s peer at the European Central Bank has a different policy outlook: perhaps more QE. Final inflation data released for October showed that inflation is not going anywhere fast: 0.5% on headline CPI and 0.8% on core inflation. For comparison, the US just reported 1.6% and 2.1%.
For the ECB, keeping inflation “at or a bit below 2%” is the sole mandate: the single needle in the compass. He may provide his own hint on action, action which will go in the direction of loosening rather than tightening.
So, EUR/USD finds itself in levels it visited only temporarily in the past. From here, there are only two more lines of support before we reach levels last seen in 2003 – yes, 13 years ago.
The first big level is still far away: 1.0520 – this is the low point euro/dollar reached back in December 2015, when the ECB added more stimulus but did not enlarge the QE program. It followed suit in March 2016.
The second significant level is the last line in the sand:1.0460. The support line was last seen in March 2015, after the ECB began implementing the QE program.
Will the pair continue downwards? Many already talk about parity, but it is important to remember that previous visits to these kinds of levels did not last too long.
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