With the ECB lowering the overnight deposit rate to negative territory last week, many traders were left disappointed. Euro-dollar did not break lower. The reason was market expectations and risk reward ratios, which many fail to take into account when trading. Markets are forwardlooking: people take positions today, expecting a specific outcome in the future. This is true for euro-dollar, as the ECB had hinted in May that a cut might be implemented in June. Euro-dollar declined by 400 pips over the period.
Since investment professionals were already short the euro, they were reluctant to enter new short positions, even if the long-term implications of the ECB's June actions are, according to most market participants, euro negative. To entice them to short further, a corrective rally in the market is needed. With the euro already down 400 pips, the decline was exceeding the historical monthly range by 50 pips. This makes the short-term potential gain lower than the short-term potential risk.
A corrective rally to the
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