Euro Short Squeeze as ECB Disappoints on QE

The European Central Bank surprised and disappointed the market today, as the President Mario Draghi announced a QE extension program and deposit rate cut of 0.10%. Neither measure was as wide or deep as many analysts had been led to expect based upon the President’s own comments of a few weeks ago, when he stated that the ECB would “do what it must” to inflate the Eurozone. The Euro immediately rose sharply as a result, by about 2% against both the U.S. Dollar and Japanese Yen, and by somewhat less against the British Pound. Shortly before the ECB’s announcements, the Euro was trading at a seven month low against the U.S. Dollar.

Although Mr. Draghi did in fact announce an extension of the ECB’s Quantitative Easing program by a period of six months up to March 2017, as well as a widening of the range of assets purchased to regional and local government paper, it was nowhere near enough to meet the market’s expectations. The volatility was exacerbated by the fact that many market participants were positioned short, egged on by market analysts such as Goldman Sachs confidently forecasting a move of similar violence but in the other direction, as well as several banks expecting a rate cut by 20 basis points instead of the actual 10. This led to a classic short squeeze in the Forex market which played out quickly as New York came online, causing the Euro to soar dramatically, reaching a high price very close to 1.09. Stocks were hit globally, but especially in Europe.

An interesting side note was provided by the London-based Financial Times, who claimed 5 minutes before the ECB announcement to have obtained inside information to the effect that there would be no cut in the deposit rate at all. The Financial Times was left with egg on its collective face 5 minutes later when the actual announcement was of a rate cut. In any case, the leak did cause the Euro to spike dramatically before the announcement was even made, and then plunge to an even lower price when the actual announcement was made, before rising sharply again and exceeding the previous high.

At 2:30pm GMT today, the daily range in the EUR/USD currency pair was 372 pips, the widest range recorded in this pair since the 24th of August earlier this year. On that day, the year’s high price of 1.1700 was made amidst wild Euro bullishness: could it be that today, we made a new seven-month low at 1.0514 which will also hold for another year and foreshadow a major trend change? This would seem to be an unlikely scenario, as with major U.S. data due this Friday ahead of an anticipated first rate rise there in almost a decade, this week’s closing prices are anybody’s guess.

Adam Lemon

Adam Lemon began his role at DailyForex in 2013 when he was brought in as an in-house Chief Analyst. Adam trades Forex, stocks and other instruments in his own account. Adam believes that it is very possible for retail traders/investors to secure a positive return over time provided they limit their risks, follow trends, and persevere through short-term losing streaks – provided only reputable brokerages are used. He has previously worked within financial markets over a 12-year period, including 6 years with Merrill Lynch.