Hopium Floats: The Draghi Effect
The market was shaken overnight as the head of the European Central Bank, Mario Draghi, stated that the "ECB is willing to do whatever it takes to preserve the euro." This opens up possible monetary relief to larger EU countries such as Spain and Italy to alleviate financial woes.
The news snapped a 5-day decline of the euro against the U.S. dollar and the yen on the expectation that the EU will boost the rescue fund. The euro made significant gains against the dollar climbing just above $1.23 this morning.
The immediate question traders should be asking is one of sustainability. Can this rally hold allowing for a new trend to emerge? Or is this just déjà vu of 2011 when the constant stream of statements helped push the market back a few feet from the cliff? A few statements does not equate to a recovery.
The Effect of "Hopium"
The 200 Pip move was purely based on speculation or a hope that Draghi's statement would render the same affect as the Cavalry riding in to save the day. That's just not how these things work. Draghi will have to put his money where his mouth is in order to see a move like this sustain itself in the long term.
Today's upswing was indeed significant but has not broken the trend lines indicating that a new trend is emerging. I am not saying that this is impossible, just that it is unlikely.
My humble projection for the EURUSD is that the move toward parity is not yet over.