When the ECB cut interest rates March 2016, the interest rate Corridor was also slashed to 40 basis points short term and 65 basis points inside the entire corridor. In December 2015 and upon the next ECB cut, the corridor was adjusted to 35 basis points short term and 60 basis points in the corridor total. September 2014 and the June 2014 warning to go negative interest rates, the corridor stood at 25 basis points short term and 50 basis points long term. Since June 2014, the interest rate corridor survived inside a short term range corridor from 25 to 40 basis points while long term the corridor stood from 50 to 65 basis points.
Prior to September’s 2014 cut to go negative, November 2013 corridor stood at 25 basis points short term and 75 basis points long term. Why the wide variation yet why the corridor stood at 25 basis points is due to the first experiments to test negative interest rates after a year long study by the ECB.
The more normalized EUR/USD, interest rate and economic system dates to May 2013 when the short term corridor was 50 basis points and 100 basis points for the entire channel. In July 2012, December 2011 and November 2011, the short term corridor was 75 basis points and 150 long term. For the vast majority of the ECB and EUR/USD life since 1999, the corridor remained within a 75 and 150 basis point channel.
As the two year anniversary approaches when the ECB went negative, European GDP growth rates ranged from 1.3 to 2.0 and now 1.8. Negative interest rates bought the ECB 50 basis points in GDP yet prior to 2014, growth rates were located from 2.0 to 4.0. The CPI index ranged from 98 to 100.5 and stands at its highest level since Euro introduction. Producer Prices at current 101 peaked at 110 September 2014 and ranged from 100 to 110 since September 2014.
EUR/USD problems are found inside its longer term ranges as price pressures are building for a big move. The further problem inside this big move scenario is equal pressure is relieved at 1.0900 and 1.1400. The point at 1.1400 is EUR/USD massive trend line point and is dropping by the month since November 2015. Yet overall, the EUR/USD price is extremely low and oversold intra day. What this means for ranges is temporarily more of the same alongside the caveat of mounting range break pressures.
The base price in EUR/USD is found at 1.0999 yet EUR/USD hits bottoms and extreme prices at 1.1027 and 1.1021, 60 pips from the 1.1083 close. EUR/USD break at 1.1134 and 1.1103 was the turning point as 1.1103 marked the downtrend point. Due to the low price and oversold, longs must break 1.1101, 1.1104, 1.1125 and most vital at 1.1134. The range becomes 1.1134 to the next break at 1.1193, 1.1206 and 1.1217. From 1.1134, further confidence to longs is found by a break higher at 1.1161.
EUR/USD moves higher by breaks at 1.1088, 1.1090, 1.1096, 1.1101, 1.1104, 1.1125 then 1.1134. A break of 1.1134 is most vital to see EUR/USD higher.
The overall strategy is longs preferred and long on price drops but against caution because EUR/USD has big problems. Vital break points are close yet all are surrounded by current prices.
Brian Twomey, Inside the Currency Market, btwomey.com