Key News

• ECB Cuts Interest Rate Half-Point to 2% as Recession Forces Trichet's Hand (Bloomberg)
• U.S. December Producer Prices Fall 1.9%, First Annual Drop in Seven Years (Bloomberg)
• Bank of America to Get Billions in Aid (WSJ)

Quotable

"What I like to drink most is wine that belongs to others.”

                               Diogenes

FX Trading - ECB Cuts 50 BPs ... Plus Key Levels on EURUSD
ECB rates to 0%? Well maybe not yet ... but now even European Central Bank interest rates are making their way to the central bank gathering point at zero percent. The market expected the ECB to cut 50 basis points. But it also considered 75 basis points was possible. And it also considered only 25 basis points was possible.

Most agreed Trichet’s post-decision comments would be the difference maker. Anyway, before overnight and this morning, the play was to sell the euro. Then the buyers came in ahead of the announcement in no dramatic fashion. But they fled the scene making way for sellers immediately after the announcement when news of the 50-basis point cut flowed from commentators through television sets and computer screens everywhere. But wouldn’t you know, the sellers have now let the buyers regain control.

With the kneejerk price reaction aside, the rate cut was almost a no-brainer for Trichet ... for two reasons: growth continues to slump and inflation (much thanks to falling crude oil) continues to decline. But in looking to longer-term price action, has this already been priced-in to the euro? Or do traders think the ECB, Europe and the euro have their work cut out for them and will continue to struggle versus the US dollar?

Well, I think you know we fall in the latter category of traders.

But technically speaking, even though the fundamentals have been shouting ‘SELL’, a chart of EURUSD wasn’t exactly saying the same. On a daily view, with Elliot Wave indicator applied, it was looking like EURUSD could soon find a bottom with a ‘wave 4’ correction.

Coming into today EURUSD was trading at a hugely important level. If it held, then potential for a sustained euro rally to higher than $1.4720 with ‘wave 5’ was possible. But with today’s price action, despite the intra-morning reversal, a new low has been made. Simultaneously ‘wave 4’ crossed into ‘wave 1’ and invalidated that pattern.

Today appears to have been hugely important and seems to bring the technical picture in line with the fundamental picture. We can think any euro rallies from this point will likely be capped at around $1.3825. A bit of a relief rally could still happen, but now it’s likely to eventually beget heavy selling that carries EURUSD to below $1.25 in the next few weeks.

The next major leg down for the euro, and up for the dollar, may have begun.