Draghi Comments Fuel Euro Sell-off

The daily December Euro futures contract confirmed Wednesday’s closing price-reversal top, triggering the start of a potential two-to-three day break equal to at least 50% of the last rally. Based on the last rally from 1.2665 to 1.3130, the 50% target is 1.2898. The current downside momentum suggests that this price is a reasonable downside target.

The market is also following a steep Gann angle from the 1.3130 top. This angle is at 1.2970 today. This angle moves to 1.2890 on December 10, putting it near the 61.8% or Fibonacci retracement price at 1.2843.

On Thursday, selling pressure helped the Euro blow through an uptrending Gann angle at 1.3005. The close under this angle put the market on the bearish side of this angle, setting it up for further downside action. The next potential downside angle is at 1.2835 today. This angle is actually forming a potential support cluster with the 61.8% level at 1.2843 to 1.2835. (See Arrow)

Fundamentally, U.S.fiscal cliff talk took a backseat to comments from European Central Bank President Mario Draghi on Thursday. In his press conference following the ECB’s decision to keep its benchmark rate unchanged, Draghi said the policy-setting committee had discussed in detail the possibility of lowering interest rates. This revelation rattled investors who used it as an excuse to liquidate long positions in the Euro.

Traders pared positions because his comments suggest that there may be enough support for an interest rate cut at the next meeting. This assessment comes on the heels of the ECB’s downbeat outlook for the Euro-zone economy for early 2013.

Thursday’s hard sell-off and today’s continuation indicates that investors are in the “sell first, ask questions later” mode. While most of the pressure is coming from the Draghi comments, some believe that traders are already beginning end-of-the-year position squaring. Combining the lingering fiscal cliff issue and the possibility of a rate cut in early 2013 may produce enough uncertainty to trigger a sideways trade until the end of the year. It seems the only factor that could drive the Euro higher is the U.S. Dollar which could collapse even further if the Whitehouse allows the fiscal cliff to occur as some are speculating.