Mario Draghi: Eaten by the Wolf

March 11, 2016

Mario Draghi: Eaten by the Wolf:
SPOILER ALERT. That is how the boy who cried wolf fairytale ends. In the ECB’s case, with a 400 pip, rip your face off rally!

EUR/USD 15 Minute:
Click on chart to see a larger view.

The biggest single day rally since the last cut in the deposit rate back in December, probably wasn’t what Draghi was hoping for when he delivered his press conference overnight…

Initially, Draghi’s package of cuts and stimulus was taken as expected and EUR/USD dropped 150 pips like a stone. But reality soon didn’t line up with expectations as Draghi signalled that there would be no further cuts from here.

From yesterday’s look at trading expectations blog:

“With the retail market overweight short, backing up 99% of economist expectations that Draghi will deliver in stimulus, to me that risk lays to the upside in EUR/USD. Just look at this morning’s RBNZ decision for an example of markets being too expectant of an outcome and getting a huge re-pricing when things don’t go to plan.”

As traders, it is all about expectations and managing where the greatest risk will lie. As you can see above, yesterday we spoke about the market being overweight short while ALL expectations were on Draghi delivering on his promise of more cuts and more stimulus. This meant that if things didn’t go to plan then the greatest risk would be an upside spike.

What did the ECB actually deliver?
– Cut in the deposit rate further into the negative from -0.3% to -0.4%.
– Increase in QE stimulus from €60 billion per month to €80 billion per month.
– Expanding QE to include the buying of corporate debt.
– Even with never ending QE, slashed inflation targets.

“Rates will stay low, very low, for a long period of time and well past the horizon of our purchases.”

“From today’s perspective and taking into account the support of our measures to growth and inflation, we don’t anticipate that it will be necessary to reduce rates further.”

The funny thing is, Draghi and the ECB were blunt about what they are doing and have been smashed for it. If they had have continued to drip feed markets with forward guidance that everyone knows wasn’t going to eventuate, the Euro probably would have fallen.

The trading lesson to be taken away here is managing the differences in expectation and reality. This scenario plays out over and over, month after month across all major news releases. You just have to change your thinking.


Chart of the Day:
DAX30 Daily:
Indices chart, DAX30 Daily, 160311
Click on chart to see a larger view.

After breaking major trend line support, the German DAX has come back to retest the underside of the level this time as resistance.

With a fundamental driver backing up the technicals on the charts, this level is well and truly in play heading forward from here.


On the Calendar Friday:
CAD Employment Change
CAD Unemployment Rate
CNY Industrial Production y/y

Do you see opportunity trading market expectations? Take advantage on your own instant $50,000 Forex demo.

Dane Williams – @VantageFX

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