During 2015 many analysts have been forecasting a dramatic drop of the EUR and even strongly emphasizing that is heading to parity against the USD. After the announcement of the quantitative easing program by the ECB back in January 2015 many traders have been shorting the euro until March when it dropped below 1.05. The delay in the increased of interest rates in U.S. helped the EUR gain some value back. The drop in the price again to the same low levels after October and until December, was purely because the markets were expecting that the Fed would not disappoint market expectations this time (and it didn't) therefore traders have been shorting the EUR once again. After a year of hopes and expectations and an increase of interest rates in U.S. in December of 2015, this month the ECB announced new measures including the purchase of corporate debt and extending its quantitative easing program.
The volatility we have experienced and the swing we have seen on EUR/USD on the 10th of March (2016) from 1.08 moving above 1.12 within a short period of time and after the announcement of the ECB and Mario Draghi's statements, sends clearly the signal that the market is reacting to a weak euro. Normally after such measures that have been announced by the ECB (extension of the quantitative program, lower interest rates, purchasing of corporate debt) one would expect a huge drop of the EUR to the levels we have seen during 2015. Indeed that is what was expected by all of us.
Stimulating the European economy is Draghi's priority but currency investors have their own agenda which is based on other factors. This particular reaction on the 10th of March could be "decoded" as a reaction to the long term potential of higher inflation rates in euro versus the potential of higher inflation rates in U.S. The measures took by surprise the market and the willingness of the ECB was discounted as it seems considering the volume during the swing from 1.08 levels to 1.12.
The decision to include the purchasing of corporate debt underscored the ECB's determination in tackling the problem of low consumer confidence which could lead to an increase in the inflation rates in Eurozone. Market participants showed a clear unwillingness to sell below 1.08 realizing that such measures could potentially increase the value of the euro. The market therefore believes in the efforts and actions taken by the ECB and the buying activity near 1.08 on March the 10th signifies the long term positive view on the Eurozone economy versus that of the U.S.
Although this might sound a bit awkward to many the market reacted and whether was a spontaneous or not action is remain to be seen but such a swing cannot be neglected and it definitely has long term underlying factors that influenced this behavior.
Technically speaking 1.08 is a strong support level which everybody was expecting to break after the ECB rate report. It seems that those that bought at this level are not panicking and have been saved probably from a further drop of the price by those on the "sidelines" waiting to buy probably on technical factors. The market reacted though during Draghi's speech and after providing details on the new measures which means the price move chiefly due to fundamental reasons and up to an extend technical factors.
The months ahead and until September 2016 which was initially the ECB's first milestone of the quantitative easing program will be crucial. In the meantime the overall economic conditions in Eurozone and a probable "Brexit" will be taken into consideration by the markets as well. Combining the above with the negative market dynamics in the U.S. equities market threatening the U.S. economy with a recession even, the unclear strategy by the Fed in relation to the interest rates and the elections in November of 2016, then we might be ahead of a very volatile year.