Summary:

• EURUSD slumps to 1.1620 on the ECB disappointment
• US dollar gains across the board after the House accepts budget
• European equities surge, DE30  nears 13200

The ECB proved to be a hit for the euro, just as we warned in our market alert (you can read the pre-ECB analysisi here). When you look at this from a distance this is not that surprising at all. First of all, positioning on the pair was somewhat extreme – close to all time high for the euro and negative (and close to multi-year low) for the US dollar. From that very reason it made sense to assume that there could be more downside than upside. Second, what the ECB actually did was extending loose policy rather than tightening it. Yes, a scale of purchases was halved (from 60 to 30 bn) but actually we now know that 2018 ECB policy will remain extremely expansive – negative interest rates (hikes have been basically ruled out), open-ended purchases (QE can be both increased and extended if needed) and reinvestment policy. When you compare all of this to a pace of economic recovery the ECB decision could be seen as too cautious and from the fx perspective – a disappointment. 

EURUSD broke through the neckline of the H&S formation, could eye 1.14. Source: xStation5 

The question is: what next? Technically, the key 1.1670 level has been broken and we are now seeing a head and shoulders formation in action. Looking at the chart we can paint the next support at 1.14.

Bond market points to much lower levels for EURUSD. Source: Bloomberg, XTB Research 

Unthinkable? Not necessarily. When you look at the bond market where USD yields keep creeping up (here a passage of the budget through the House helped as well) and the Bund yields under pressure the spread is actually pointing to much lower levels than we currently see!

USDIDX surges, eyes 96.50. Source: xStation5 

The situation is even more clear on the US dollar index (USDIDX on the xStation5 platform). A break of the 94.00 level has been very decisive here and the Index (one of our top 5 picks for the current quarter) could be on its way to 96.50. 

Unsurprisingly, these ECB and fx moves were read as very positive for European equities – more expansion plus weaker currency has been enjoyed by the German stock market with DE30 surging to all time highs and adding to the move today at the opening.