CrowdThnk Blog


EUR Positions Squeezed as Draghi Throws Cold Water on Tapering Fears with Dovish Twist

As the Eurozone has rebounded significantly with growth (+2.3% YoY) outpacing both the US and UK this year and the Unemployment Rate heading lower, market investors were prepared for a qualifying validation of this economic activity today from Mario Draghi, the European Central Bank, in the form of more explicit guidance on the termination of Quantitative Easing (QE) Programs.  Instead, they were left blindsided, as Draghi threw cold water on any hopes of Hawkish rhetoric, preferring to reserve the right to boost QE in the future, despite all the progress made over the past year, not committing to permanently end QE after September 2018.

CrowdThnk’s proprietary positioning score placed the market positioning on EURUSD at a score of 8.46 out of 10, signifying Overweight and crowded long positioning.  The net effect of these actions combined with market positioning resulted in a major reversal of the EURUSD exchange rate, which had been climbing more than 100pips within the previous 24 hours leading up to the event, as the EUR plummeted over 150 pips and breaking the 100-day moving average (1.1674) in the process.   This opens up a potential move lower to the 200-day moving average at 1.1240.   In the currency world, CrowdThnk’s research has found that the majority of currencies in the foreign exchange universe are mean-reverting once they reach an extreme reading - either overbought or oversold – and can quickly reverse on a major catalyst event as market positioning gets flushed out.

While he insisted that the ECB’s communication was “pretty effective”, in that most analysts correctly predicted the ECB would promise to buy €30bn in bonds a month from January until September 2018, Mr. Draghi was pleasantly satisfied with the outcome of his statement: A lower EUR currency exchange rate and higher European Stocks.  Draghi was reluctant to say that the ECB will eventually run out of assets to buy, suggesting they could replace government bonds with corporate debt if need be.  Draghi may be keen to remind market participants that they’re not likely to repeat the mistakes the ECB made in 2008, when they hiked just before the financial crisis, or 2011 when they hiked rates during the midst of the sovereign bond crisis.  In doing so, Draghi assured any investor that was bullish the Euro and looking for a hawkish statement that today would not be that day, tempering heightened ECB expectations with cold, dovish water.