Thursday, 2 Dec 2010

Euro Supported by ECB Bond Purchases

The announcement by ECB President Jean-Claude Trichet to extend ECB liquidity provisions helped to continue the mini euro rally into today. Trying to decipher if the rally has legs or is simply a technical correction may be more complicated.

Following the release of the Minimum Bid Rate which as expected was held steady at 1.00%, European Central Bank President Trichet announced the intention of the ECB to continue its program of buying European sovereign debt.

Many traders were disappointed that Trichet did not implement extra provisions to tackle the European debt crisis. Speculations were for an increase in bond purchases by the ECB of those financially troubled nations or potential quantitative easing measures. However, only the decision to maintain current levels fo bond purchases was announced, something that lacked the shock and awe approach the Federal Reserve takes to stimulate a reaction from financial markets.

The announcement did help to boost the euro versus the dollar with the EUR/USD rising to a high of 1.3246 from an opening day price of 1.3105.

One hypothesis for the euro rally may be traders closing out profitable shorts in the EUR/USD. If this is the case then market participants will be waiting for future opportunities to short the euro, selling into any rally such as the one we've seen over the past 48 hours.

Good short opportunities may be found tomorrow with the release of US Non-Farm Payrolls. Resistance for the EUR/USD comes in at 1.3330, the rising trend line from the June to November move. This level also bears significance as it coincides with the August high.

Any rally to this level should be sold into. Traders may want to target the 61.8% Fibonacci retracement level from the June to November move as well as the bottom channel line which has supported bearish moves in the pair both in mid-November as well as the recent low.