Euro/dollar has been advancing for three weeks and is testing the top of a symmetrical triangle. Its ability to close the week convincingly above it would signal a reversal of the previously held expectations for a decline of euro/dollar in 2016.
Source: Thomson Reuters Eikon
Mario’s move
Euro/dollar has been powering higher for most of March, and the most defining day of its upmove was March 10. This is when European Central Bank President Mario Draghi presented the ECB’s policy in an unusually clear manner: one more bout of easing (cutting rates and expanding asset buys), but also the last bout of easing.
The market had expected the ECB to cut and the Fed to hike borrowing costs throughout of 2016, thus torpedoing euro/dollar; consequently, the second part of his speech caught the market wrong-footed. To bring it home, euro/dollar dropped 140 pips on the easing news, and then surged 400 pips on news that easing in the euro zone is over. A 540-pip in one day is quite rare in the realm of FX!
The aggressive recovery owes to reversal of short positions, new long positions, and also to the recovery of the commodity markets. The positive correlation between euro/dollar and the CRB Index has been rising significantly in the past two weeks.
Source: Thomson Reuters Eikon
Waving the bullish flag
Euro/dollar rammed through the top of a symmetrical medium-term triangle at 1.1307 and it’s only 40 pips away from marking a five-month high. It also vaulted above 1.1294, the 23.6% Fibonacci retracement of the downtrend between May 2014 and March 2015. A bullish flag formation, with the start of the flag pole at 1.0820 on March 10 targets the 1.1525 area.
