While traders are excited about Draghi's promise of unconditional bond buying and the anticipation of QE3 has propelled the euro up, the long term economic consequences of this intervention is overwhelmingly bearish for the euro (NYSEARCA:FXE).
Despite rising stock prices, the European economy continues to slow. Manufacturing PMI's throughout the eurozone are below 50 and continuing to contract. Retail sales, exports, and unemployment rates are also moving the wrong directions throughout Europe.
ECB action will able to contain borrowing costs (at least in the near term), but this could do little to boost the prospects of the European economy without serious structural reforms. Even at lower interest rates, the absolute level of debt in Italy and Spain will be difficult if not outright to impossible to payoff without a debased Euro. If Spain and Italy agree to further austerity as condition of these purchases, this may drive their economies further into depression, therefore adding more negative stress to the eurozone.
Now let's assume that ECB bond buying fails to restore financial confidence in the eurozone. LTRO was supposed to be a panacea for debt crisis too, but it simply delayed future debt pressure. Despite claims of "sterilization", the ECB will need to print hundreds of billions of Euros to buy up all of the short term Italian and Spanish bonds needed to support the interest cap. This motion is clearly inflationary and bad for the purchasing power of the euro.
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Technically the euro is extremely overbought. Friday's price action to 1.28 closed above the upper Bollinger band. Also the smoothed Wilder 14 day RSI is at 73.19, well above the 70 overbought mark. On the headline side, what good news is left in Europe to further drive up the Euro? The bulls got all the wanted with the Draghi plan. Also, the US dollar is severely oversold with a 27 RSI and sentiment is extremely bearish on the currency.
Overall, I believe the euro will fall whether or not ECB intervention successfully prevents the breakdown of the eurozone. Draghi's policy is clearly inflationary. Although the euro has a better chance of surviving, it will survive at a severely lower valuation because of the need to monetize debt in attempt to solve the eurozone's debt crisis. I would wait to the announcement of the German court and the Fed before entering a position as a QE3 announcement can cause a blow off top in Euro, before it scales back down to my price target of 1.18 with a possible undershoot. However, with the Fed possibly increasing its efforts to debase the US dollar, it may be better to short the euro in terms of a stronger currency such as the Australian dollar, the Singapore dollar, or even gold.