Stronger Stimulus Measures Weaker Euro

STRONGER STIMULUS MEASURES
WEAKER EURO
By www.Options-Trading-Education.com

http://www.options-trading-education.com/24227/learn-to-trade-options/
Forex traders take note. The
European Central Bank has speeded
up debt purchases in their quantitative
easing program.

As the result the Euro
tumbles again. Reuters reports the
story.

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Before We Continue…

Equities around the world jumped on
Tuesday and the euro tumbled on
signals the European Central Bank
may accelerate its 1 trillion euro bond-
buying program over the next two
months.

The dollar gained 1.6 percent against
the euro and was broadly ahead for a
second day, while U.S. Treasuries fell
on government data showing that
U.S. housing starts in April rose to a
nearly 7-1/2 year peak.

The fact of the matter is that the
European Union needs to break out of
its fixation on austerity measures,
inject currency into the economy, let
interest rates fall and stimulate a
lagging economy.

While the USA led by former US
Federal Reserve chairman Bernanke
instituted a quantitative easing
program to the tune of $85 billion a
month in the USA the EU tightened its
collective belt.

The results were a recovering US
economy and a European economy at
risk for falling back into recession.

The European Central Bank is finally
following the US example which is
serving to drive the Euro down in
relation to all currencies and send the
USD and EUR to parity.

Front Loading?

Not only is the European Central
Bank going to continue its quantitative
easing program but is apparently
going to charge hard at the beginning.

The Wall Street Journal reports on
how the ECB is going to front-load
its stimulus program.

The euro fell hard against the U.S.
dollar Tuesday, while European
stocks and bonds surged on the
prospect of the European Central
Bank ramping up its asset-purchase
program in May and June.

“Even though this is just front-loading,
it is effectively an increase in the size
of quantitative easing, even if just for
a short period of time,” said Simon
Derrick, a currency strategist at BNY
Mellon.

“It shows that within the existing
framework, the ECB is willing and
able to be incredibly flexible,” Mr.
Derrick said.

Traders will take note that this front-
loading of the stimulus program may
well drag the Euro down over the next
month or so and allow it to recover
along with weakened stimulus
measures later on.

This may provide opportunities for
USD EUR traders in both up and
down directions.

The Technical Angle

Fundamental traders look to see what
the central bankers will do.

Technical traders watch the market for
cues.

CNBC wonders if the current price
pattern signals a change or a
breakout of the Euro to the upside.

The fast and decisive breakout above
the historical resistance level near
1.10 has encountered short term
resistance near 1.14.

This has the potential to develop a
inverted head and shoulder trend
reversal pattern.

The pattern is completed with a small
retreat from short term resistance
near 1.14 followed by a rally that
moves above 1.14 and tests
resistance near 1.16.

In this case it’s the confirmation of the
inverted head and shoulder pattern
that is more significant than the
historical resistance near 1.16.

Confirmation of an inverted head and
shoulder pattern sets an upside
breakout target near 1.22.

This is well above the value of the
downtrend line.

This confirms a new uptrend rather
than just a rally and retreat pattern.

Head and shoulders patterns are
classic indications of market reversal.

The market tests the top in a head
and shoulders pattern and retreats,
tests again and retreats only test one
more time before falling.

The inverted pattern is a signal that a
falling market will rise.

As strong stimulus measures weaken
the Euro it will come to a low and
eventually recover.

The fundamentals are that the
European economy will get better and
allow the central bank to back off.

But the market often sees the future
with patterns like the head and
shoulders.

Stronger Stimulus Measures Weaker Euro

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