In a shock move today the European Central Bank (ECB) cut interest rates to 0.0%, now this heralds a major turning point as it shows that the ECB is certainly looking to tackle inflation head on and I now expect markets to be much more receptive to the usual jaw boning from the ECB. So far the result has been positive as European equity markets have jumped and the Euro has looked very strong after today's result. Previously in December the market expected this exact movement to happen and it never eventuated, now the market has rewarded Draghi but it's hard to tell if this is the correct move in fighting deflation, but it's certainly a step in the right direction from the sceptics point of view. One interesting point to take away from all of this is that Draghi does not believe that the ECB will cut interest rates further, which shows that there may be some negative thinking behind negative interest rates and the actual ability they genuinely have in the marketplace.
On the charts the Euro rally was 300 pips and it looked unstoppable, but it will be interesting to see how the EURUSD rally holds up in the face of FOMC in the coming week. For myself the next major level of resistance is at 1.1318 and it's likely to lift to this level in the wake of the news out of today, however the market might be reluctant to be bullish given the likelihood of a heavy FOMC in the coming weeks. Above this key level 1.1454 is the next heavy level of resistance and this for me would be the line in the sand, above this the bulls are taking control and we could see a very strong run.
On the other side of the world the NZDUSD continues to be a mixed bag as Chinese CPI data helped provide a boost to the high flying kiwi, as CPI data came in much stronger than expected at 2.3% y/y (1.8% exp). This was a strong result and has provided some hope that the Chinese economy might not be the paper tiger it has been described as of late. Many will now be looking at the upcoming food price index for the NZ economy, which might help the market figure out further inflation figures across the board for the NZ economy. But obviously the main movement was yesterday when the RBNZ looked to cut rates to 2.25%, and the market is still feeling this change, which may required the RBNZ to jaw bone the situation after banks looked to stand still on mortgage rates which is a concern for the RBNZ.
On the chart the bullish trend line I spoke about yesterday is looking very much alive after there was a strong rejection of this level for the NZDUSD. The RBNZ will be watching this closely, and I do feel that we may actually see jaw boning from Wheeler in the near future if it fails to drop in the near term. At the moment resistance at 0.6655 is looking all the more potent, and I wouldn't be surprised to see a strong squeeze in the short term on the bullish trend and a breakout, but we may have to wait till next week to see these movements.
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