The Draghi Protocol

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Forex Market News

In what was a pretty quiet trading session thanks to the USA market holiday for MLK Jr oil still makes the headlines. This time it was Iraqi stockpiles that slapped the bulls back down, with price currently down another 2.4% at 47.52 (WTI).

However, it is Draghi and the ECB that is dominating the wires overnight. Conflicting signals are the order of the day. That is to be expected when so much is riding on the outcome. There are three possible scenarios, so let’s play them out.

a) Draghi will come out all guns blazing. This will certainly justify the SNB move and what the Eurozone needs (as much as I hate QE they have backed themselves into it so now must do it…Nike it). Releasing a strong QE and backing it vocally in the media. There can be no disappointment, if there is then what we will have is the third scenario.

b) But before I get to that I will go to the opposite side of the spectrum in the 2nd scenario and that is that the ECB does nothing. This is the most unlikely event, however it is still possible. He has a great track record of vitriol and no action. All bark and no bite. With oil already creating inflation and his previous debt purchase program still filtering through there is the chance that he might just come out and say we are waiting to see the full effect of this first. Even though it is taking f-o-r-e-v-e-r to do.

c) The third and most likely scenario is that the ECB does announce QE of some form, however it will disappoint the market. This disappointment coming by either not being aggressive/large enough, or that it is so dependent on external factors (like the delay currently with the debt program) that it is seen as worthless anyway.

So, how do we trade this, or take advantage of it? What will happen??? Already we are seeing profit taking and the market expectations are for a rally. I have been saying this for weeks that it will. Either way there will be a lot of interest in the outcome and much volatility around the release (12:30am Friday morning Sydney time).

If scenario (a) occurs you could expect to the sell-off to continue. Whilst in the long run it is bullish, the short to mid-term it is bearish. Scenario (b) would see a rally. The market is very much overdone and the risk is for a retracement. If (b) eventuates that risk is realised and the retracement could be drastic, ie 1.20 or higher could be on the cards. Scenario (c) is not so easy to pick. I expect there would be a lot of “jostling” for direction but the general sentiment would be bullish too. The bulls would come in, much for the same reason as for (b), we are simply too far gone and if QE is not coming as expected or needed then we are too far from value, too cheap. Although I do not see it getting through 1.20 in scenario (c), perhaps 1.19 highs.

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