EUR/USD and Draghi: Levels, Ranges, Targets

 

What we knew about King Draghi before any announcements was his position is weak as the Money Supply is overbought and interest rates fairly oversold. Draghi revealed his weak position by no comments regarding interest rates and the money supply. Draghi doesn’t want a rise in interest rates nor restriction to the money supply but he can’t have both as it must be interest rate rise and rescind the money supply or vice versa. In this relationship lies the proper level for the exchange rate and I don’t believe as a speculation the ECB has an intended target.

The key in this regard is the statement Inflation will be volatile over time. The question what is the proper level for Inflation, the 4th element, in regards to interest rates, money supply and the exchange rate. If the 2% Inflation Target is viewed in relation to the overnight rate then Draghi’s upper target from current 1.30 is the mid point at 1.81 then on to the vicinity of 2.3 at the highest end. The low end is located at 1.17.

Overall Draghi’s volatility in Inflation will be seen from 1.17 to 1.81. Don’t expect exchange rate volatility from such small numbers as we’re working on the far right side of the decimal point.

In relation to negative interest rates and by Silvio Gesell standards from 1906 in the Natural Economic Order, the Inflation rate should perfectly track the interest rate since the difference between Inflation and interest is minimal in relation to the price level. This relationship must hold extremely steady as the risk is to high Inflation risks a lower GDP. Draghi had nothing to say yesterday as he’s walking a tightrope.

Yesterday EUR/USD as well as EUR/JPY remained confined to the reported ranges. EUR/USD’s bottom was 1.1457 against the break point at 1.1465. Just above the break point at 1.1465 was levels 1.1488 and 1.1471. EUR/USD bouced from 1.1479 . The bounce was not only normal as EUR hit supports but we were getting the bounce anyway. We needed Draghi to inform where.
The next big line break point was 1.1564 then on to 1.1624. One aspect to understand in currency prices is the miles of difference between an everyday trade able level and a vital break point. It was natural and normal trading to continue longs at the break of 1.1564 but not normal to continue past 1.1624.

By this time the question is where is the short points and where to for targets. We don’t play games in our trades as we get in and get out as the break points allow. If the ECB traded yesterday, they traded the exact same points as we did.
EUR/USD. The big break line below for today is 1.1602. EUR must first break 1.1638, 1.1623 and 1.1608 then 1.1602. We will take longs in this area.

Above break points are located at 1.1703 and a 101 pip range from 1.1602. Yesterday’s range was 109 on either side of the break points so today we have a slight restriction of the range. While the overall break points restricted, the daily pip range expanded from yesterday’s 58 to today’s 59. And we’ll leave it here to ponder.

 

Brian Twomey

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