The euro tumbled on Thursday for its worst day this year against the U.S. dollar amid the ECB (European Central Bank) extended its bond purchases into September 2018, diminishing the chances that the ECB would raise interest rates next year.
The EUR/USD crashed around 0.01616 or 1.37 percent yesterday, to close at $1.16494, erasing all of gains occurred during this month. While the U.S. dollar index surged to 94.550 at the same time, potentially leading the next round of appreciation.
Traders dumped the single currency after the ECB prolonged the bond purchase by nine months to September 2018 and remained some chances to extend it if it is necessary. The plan of its monthly bond purchase has been reduced by half to 30 billion euros beginning in January next year.
Rather than entirely exiting quantitative easing (QE), the reduction of QE from the ECB has been result from the current low level of inflation around the euro area. There was the market expectation that the central bank will declare to exit QE next year and cool down the economy to avoid its overheat.
Draghi, who expressed some optimism about euro zone growth at his press conference, remained cautious about the region’s sluggish inflation which would need continued heavy stimulus in the form of quantitative easing (QE) from the ECB.
The dollar climbed in recent days on optimism about forthcoming federal tax cuts and market speculation that President Trump would select someone to head the Fed who may want to raise interest rates at a faster pace than current Fed chair Janet Yellen.
U.S. President Donald Trump is selling tax reform to Americans on the promise that it will create extra income for companies to invest in their businesses and create jobs. Some of the U.S. corporations said that they would use a tax reform windfall to buy back shares, retire debt and other shareholder-friendly moves.
The aim of corporate tax cuts conducted by the Trump administration, from 35 percent to 20 percent, is to encourage multinationals to bring home profits held overseas, giving more incentives to build plants in the United States rather than overseas.
Technically after a sharp decline of the pair, it already broke out the support level of Aug. 17’s low. The EUR/USD is consolidating in a descending price channel started from late August. In the event that it succeeds to break out the lower channel line, it may decline at a faster rate.
With the Relative Strength Index (RSI 14) showing that it is moving in a descending trend, the pair is now in the bearish market until it finds supports on its decline.
Chart 1: EURUSD Daily
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