New Year, Same Result – EURUSD Collapse Continues into 2015

For many people, the New Year represents an opportunity to turn over a new leaf and start fresh. Apparently, EURUSD traders did not get the memo.

As we go to press, the world’s most widely-traded currency pair plumbing new multi-year lows in the first trading day of 2015. The catalyst for today’s drop was fresh dovish rhetoric from ECB President Draghi, who gave the clearest signal yet that sovereign quantitative easing may be coming down the pipeline. In an interview with the German newspaper Handelsblatt, Draghi stated,

“The risk that we don’t fulfill our mandate of price stability is higher than it was six months ago. We are in technical preparations to alter the size, speed and composition of our measures at the beginning of 2015, should this become necessary, to react to a too-long period of low inflation. There’s unanimity in the ECB council on that.”

Previously, the central bank had highlighted falling inflation expectations as the “trigger” that could cause it to introduce a full-blown QE program, and with price pressures fading across the board, such an action is increasingly likely heading into the bank’s January 22nd meeting. The market reaction supports this view, with bond yields in many European countries (including Spain, Italy, Belgium and France, among others) dropping new euro-era lows.

EURUSD, meanwhile, has fallen to test its 4.5-year low at 1.2040, though bulls are defending that key support level is holding up for now. As a reminder, the 1.2040 level marked the Summer 2012 bottom in the single currency, when Draghi promised to do “whatever it takes” to turn around the eurozone economy.

On a technical basis, there may still be scope for further drops. As the 4hr chart below shows, the MACD is trending down below both its signal line and the “0” level, showing strong bearish momentum. The RSI is deeply oversold on both the 4hr and daily chart (not shown), raising the probability of a short-term bounce, but if the 1.2040 level is conclusively broken, a quick run down toward key psychological support at 1.2000 is likely.