On the back of the European Central Bank meeting yesterday, the question we’re left asking ourselves is when and if so, how much will Mario Draghi and his Constituents pair back their Euro Zone sovereign debt purchases aka QE.  The ECB has been buying up nearly 60B worth of assets since March and previously as much as 80B.  It’s a widely held consensus view that Draghi will trim Euro Zone QE at the end of the year, announcing the policy decision at their October meeting.  However, yesterday we did hear a more reserved and certainly less hawkish ECB.  Draghi expressed some concern for the rapidly rising EUR/USD exchange rate, and it’s potential for impeding on Euro Zone growth and inflation progress.  Draghi did however revise EZ growth outlook higher, all the while revising inflation forecasts lower for the next two years.  The Euro Currency’s bullish drive vs the USD (+13% ytd) has been one of the largest consensus held viewpoints according to CFTC data.  Adding further fuel to the fire has been the US Fed and Janet Yellen’s dovish pivot on US interest rates.  Tracking US Fed Funds futures and the CME Fed Watch Tool, the market is currently pricing in the odds of a December rate hike by the Fed at a paltry 31% chance.  So the ball is in Mario Draghi and the ECB’s court and the market is watching closely.  While we don’t expect a full end to Euro zone QE, we do expect a pairing of its asset purchases back to 40B and possible extension thru 2018.  All of the guessing aside, the EUR/USD is presently in bull formation, however caution is warranted for “johnny come lately”, as we’re in a very overbought state.  Consider becoming bullish into corrections closer to 1.1720, which was the Euro’s breakout from a nearly two year sideways/bearish trend.  Furthermore, keep your ear to the ground for any pivots in US Monetary Policy from dovish back to hawkish, this will certainly hamper the global exchange rates. 

Euro Weekly Chart; Previous break-out level of 1.1710 should now act as support

Euro Weekly Continuation Chart

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John Caruso

Senior Market Strategist

Follow John on Twitter @JCarusoRJO. John began his career at Wilshire Quinn Capital, a Wealth Management Firm based out of Los Angeles, California. John made his move to the commodity industry at the end of 2005, and began his path at Lind Waldock, at the time the largest retail brokerage division worldwide. John did his undergraduate work at Robert Morris University in Pennsylvania from 1999-2003, where he was a 4 year varsity basketball letterman.  A self-professed “Macro Trader”, John uses a multi-factor fundamental and “quantamental” trading model in distinguishing market cycles based upon the accelerations or decelerations of growth and inflation metrics. His technical and quantitative approach is heavily reliant upon trend and market range analysis via a custom built standard deviation system in helping him make probability-based market decisions. John is an avid reader of all things pertaining to finance, and behavioral economics. Click here to sign-up for John Caruso's Trading Coach Insights. Daily information and insight on all futures marketsin ranging from metals to equities.

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