Last night’s statement from ECB was a text book central bank “jaw bone”. A statement perfectly pitched and timed for a beneficial market impact without (so far) needing to commit more funds to push Spanish bond yields down.
I mean this as a compliment to Mr. Draghi. To the extent that a well timed “announcement impact” can reduce the weight of money subsequently required to push rates lower, last night’s statement looks a tactical success. This is in contrast to his predecessor whose statements, on occasion, seemed timed to snatch defeat from the jaws of victory.
Could it be that a certain L. Fibonacci is working alongside his Italian compatriots, Marios Draghi and Monti, to improve the situation in Europe? The EUR:USD rally of the past 2 days started from a significant Fib cluster level, creating the possibility that this rally may have quite a bit further to go.
I am a great believer in reading what Central Bankers actually say rather than relying simply on media summaries and interpretations. These interpretations can help to provide context but I find you can often get a much better sense of the significance of a statement by going to the source as well. If you are interested, you can read the relevant excerpts of Mr. Draghi’s speech via this link to the Wall Street Journal.
The decline in EUR: USD from the peak at 1.3486 in February formed a 5 swing structure. I’ve outlined this on the chart below.
Tuesday’s low finished about 35 pips above a cluster of Fibonacci projections. I reckon that on a daily chart this is close enough to represent a rejection of that Fib cluster zone.
When the 5th swing in a structure ends at a Fib cluster zone, it can provide a good clue that the whole 5 swing decline has ended. Last night’s strong rally gave a further clue, by pushing through or “overlapping” past the resistance of the low at “3” (dashed line)
The Fib cluster zone shown on the chart above projects that swing down from 4 to 5 would be:
- 61.8% of the move down from “0” to “3” and
- 161.8% of the length of the correction from “3” back to “4” (external retracement or expansion)
When the 5th swing in a major move ends, you will often get a major rally (at least a correction of the whole 5 swing structure). The weekly chart below outlines a couple of possibilities.
More often than not a correction of a major move will go at least to the 38.2% retracement level. This coincides at with the major overlap low on the weekly chart at around 1.26.
A move past this overlap resistance sets up for a correction of the whole move down from 1.494