We contend that much like at the start of the financial market crisis, those who attempt to get ahead of the curve the quickest will come out the mess the quickest. The Fed and BoE were the first to start cutting rates aggressively, and they are now the first to introduce quantitative easing measures. We believe the ECB will need to do the same which will ultimately weigh on the cross rate.
FED AND BOE WON’T BE THE ONLY CENTRAL BANKS TO INTRODUCE QUANTITATIVE EASING
Fundamental Catalyst – Wednesday’s event risk in the form of the Fed formal introduction of quantitative easing has shaken the markets and acted as a catalyst for a massive wave of broad based USD selling, on the assumption that the policy will devalue the greenback tremendously. Similarly, Sterling has also been beaten down of late on the back of the news that the BoE had also introduced formal quantitative easing into their monetary policy. However, the view that these currencies should depreciate on the newly adopted central bank strategy, will only work if they are the only banks to introduce such a policy. We contend that much like at the start of the financial market crisis, those who attempt to get ahead of the curve the quickest will come out the mess the quickest. The Fed and BoE were the first to start cutting rates aggressively at the onset of the crisis, and they are now the first to introduce quantitative easing measures. Much of the rapid depreciation in the Euro off of its 1.6000 life-time highs occurred when the markets finally saw that the ECB would indeed have to change their tune and start to adopt a more accommodative policy. We see things no different now, and believe that the ECB (along with other central banks) will be forced into a quantitative easing mode over the next few months which should ultimately weigh on the Euro which Is highly overvalued on a relative value basis against Sterling.
Techs – Eur/Gbp: The cross continues to rally sharply trading just shy of 0.9500 on Wednesday ahead of the latest minor setbacks. Key topside resistance now comes in by 0.9520 which represents the medium-term lower top from January 26. Daily stochastics are now stretched however, and the daily RSI is nearly above the critical 70 level. As such, we see the risks for only a little more upside before the cross starts to roll back over. The 78.6% fib retracement off of the 0.9805, 2008 life-time highs to the 2009 0.8635 lows, comes in by 0.9550 and we will look to establish a short position by this level should the market continue to rally into Thursday. Strategy: SELL @0.9550 FOR A 0.9320 OBJECTIVE, STOP @0.9660. Stops to be trailed to cost on a break back below 0.9500. If trade triggers and 0.9500 not broken, position to be closed out at NY close (5pm EST) on Thursday. Recommendation to be removed if not triggered by NY close on Thursday.
Written by Joel Kruger, Technical Currency Analyst for DailyFX.com
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