ECB Decision Leaves EUR/USD Trades Guessing

The EUR/USD rallied after the European Central Bank’s 24-member Governing Council left the main refinancing rate at 0.05 percent at its meeting today. The deposit rate and the marginal lending rate remained at minus 0.2 percent and 0.3 percent, respectively.

The Forex pair moved further after the European Central Bank failed to provide details on the size of a plan to buy private securities. The rally was fueled by the notion that the new ECB plan lacks details on size, raising doubts as to whether it would expand the central bank’s balance sheet enough to weaken the currency. In other words, the recent break in the Euro may have been overdone, leading to today’s short-covering response.

The lack of information from the ECB made it difficult for traders to gauge how aggressive the central bank is going to be expanding its balance sheet. The recent sell-off and today’s price action suggests traders were looking for a specific target of the size of the asset purchases and didn’t get it. So they decided to take profits and reduce their short positions while waiting from fresh news.

What traders seemingly took away from today’s press conference by ECB President Mario Draghi was that the central bank will start a program this month to buy-asset backed securities and covered bonds, however, initial buying will probably be modest. The timing of the first purchases could cause volatility and a two-sided trade over the short-run because it will keep investors guessing as to the scope of the purchases.

There was no Bank of England monetary policy committee meeting today, but this didn’t stop the selling pressure. The meeting will take place later this month.

Today, the GBP/USD weakened for a seventh day after BOE policymaker Ben Broadbent suggested the U.K. economic recovery may not be strong enough to warrant an interest-rate increase. Broadbent said in an interview with ITV that Britain is “not ready yet” for a rate increase.

The selling pressure from Broadbent’s comments was strong enough to offset a bullish report that showed U.K. construction expanded at the fastest pace in eight months.

Weakness in the U.S. Dollar ahead of tomorrow’s Non-Farm Payrolls report helped boost December Comex Gold prices today. Hedge and commodity fund traders are heavily short so any signs of weakness in the dollar could trigger a massive short-covering rally. Also underpinning gold are geopolitical events in Ukraine and the Middle East.

November Crude Oil futures plunged below $90.00 today, putting the market close to taking out the low for the year at $87.85. If downside momentum continues, traders can look for an even further decline into last year’s low near $84.00.

Fueling the sell-off is news that supplies from Russia, Saudi Arabia and the U.S. are outstripping demand. Traders are also reacting to the news from the U.S. Energy Information Administration that the nation’s crude oil output will rise next year to the highest level since 1970. Currently, U.S. crude oil production is at the highest level since 1986, while OPEC output climbed to the highest in a year.

In other news, the U.S. reported factory orders dropped 10.1 percent in August, after climbing 10.5 percent the previous month. Traders were looking for a 9.5 percent decline. It was also reported that U.S. Weekly Unemployment Claims unexpectedly fell in the week-ended September 26.

Tomorrow’s U.S. Non-Farm Payrolls report is expected to show the economy added 215,000 new jobs in September. In August, the economy added 142,000 new position, which was below estimates. This means traders should watch for a revision of last month’s figures as well as a new headline number.