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Euro Tumbles to Fresh 12-year Lows on QE Announcement

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The Euro tumbled to a fresh 12-year low against the greenback following the ECB’s announcement of a new quantitative easing program that was announced during the European Central Banks monetary policy meeting. Central Bank President Mario Draghi announced sovereign bond QE for the Eurozone, larger than expected in size, but according to the ECB’s capital key and with only limited risk sharing.

The central bank will embark upon overall purchases of around EUR 60 billion per months through to the end of 2016, which puts the total at over EUR 1 trillion. If nothing else the program will help to re-inflate the Eurozone via the exchange rate angle and give a lift to growth through improved exports, but the move doesn’t solve the Eurozone’s underlying problems. At the same time it highlights the growing divergence of views among policy makers and EMU weariness not just in peripheral countries. Anti-EMU forces in Germany will likely gather strength after Thursday’s decision, a development that should not be underestimated. The ECB announced a sovereign bond purchase program, which will run alongside the current ABS and covered bond purchase program.

Purchases will be limited to 25% of the volume of an issue and 33% of total issuer volume in order to comply with the statement of the European Court of Justice that ECB purchases shouldn’t prevent effective market pricing. The ECB will purchases EUR denominated investment grade bonds issued by Eurozone member states. Purchases of Greek bonds will depend on a waiver as well as a positive bailout review, but the 33% issuer limit also means that purchases will only be possible in July at the earliest, after the redemption of SMP bonds.

Not surprisingly the decision wasn’t taken unanimously, with Bundesbank President Weidmann likely the key opponent, but while Germany may contribute 25% to the ECB capital and remains the largest Eurozone economy its influence has diminished steadily since the start of EMU and with the new rotation system in place now, Weidmann will not even participate in all meetings this year.

The technical on the Euro remain negative as the currency pair is poised to test support levels near the 2003 lows at 2.0760.  The currency pair is oversold with the monthly RSI (relative strength index) printing a reading of 24, which is well below the oversold trigger level of 30.

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