EUR/USD Fundamental Analysis – week of December 12, 2016

EURUSD had a negative week as a combination of higher yields in the US along with the extension of the QE program by the ECB helped to push down the pair towards the range lows at 1.0550. The key event for last week was the ECB rates and the following press conference by Draghi and this was followed very closely by the market to know what the ECB would be doing with regards to the QE program that it has been running and that which was scheduled to end by March 2017. The market was looking for a timeline for tapering of the program and an eventual end to the program in due course of time.

The pair was moving up steadily towards 1.08 during the early part of the week and even reached the 1.0870 region immediately after the press conference began but Draghi announced that the QE program would be continued till the end of December 2017 and that the ECB would continue to remain in the markets till 2018 atleast. The total stimulus was 560 billion euros while the market was expecting only 480 billion euros. This announcement of the continuation of the QE program was extremely negative for the euro and it dropped promptly through 1.07 and then crashed through 1.06 and reached the strong support region at 1.0550 where it rests at the end of the week.

We have been mentioning that the region between 1.05 and 1.06 was a key support region and with the Fed meeting looming ahead where they are expected to hike rates, it remains to be seen how the market reacts to the statement in the coming week as the rate hike is already priced in. Last December, we saw a round of dollar weakness after the announcement while the traders were expecting strength. News based reaction of the markets can go either way and so it is important that traders do not assume any kind of response and trade with an open mind. Apart from the FOMC statement and rate hike, we also have the retail sales and CPI data from the US and all these should guarantee a lot of volatility in the market in the coming week. Contra traders can risk a small long in this region with a stop loss below 1.0450 if they can afford it.