EUR/USD rally hits a roadblock ahead of ECB
Fawad Razaqzada January 19, 2018 6:26 PM
The appreciating exchange rate means the central bank will be even less willing to tighten its belt early. So, don’t be surprised if Mr Draghi and co come out with some dovish remarks on Thursday, which could weigh on the euro.
Next week the Bank of Japan and the European Central Bank will announce their respective interest rate decisions, while there will be some key macro data to look forward to as well. Both the BoJ (Tuesday) and ECB (Thursday) are likely to hold their monetary policies unchanged, but the yen and the euro could move sharply nonetheless in the event of verbal intervention from either central bank. The euro in particular has been very strong over the past several months amid speculation that the ECB would end its QE purchases programme earlier than expected due to consistent improvement in Eurozone data and higher rates of inflation. However, the appreciating exchange rate means the central bank will be even less willing to tighten its belt early. So, don’t be surprised if Mr Draghi and co come out with some dovish remarks on Thursday, which could weigh on the euro. In terms of key macro data, the latest PMIs from the Eurozone manufacturing and services sectors will be released on Wednesday and US Advance GDP will come out on Friday. These figures should help to provide further direction for the EUR/USD exchange rate. It is worth pointing out that the US dollar is looking severally oversold as well, so we wouldn’t be surprised at all if the EUR/USD were to head lower for a while.
Ahead of the above fundamental events, the EUR/USD has hit a bit of resistance around the 1.23 handle, with price unable to close decisively north of 1.2260 for five consecutive days now. Clearly, speculators have been happy to take profit at these ‘overbought’ levels, as indicated for example by the RSI hovering around 70, after the sizeable rally at the start of the year. Whether this is just a pause for breath, a pullback or a trend reversal is not clear just yet. If support at 1.2185-1.2200 area breaks down then expect price to ease towards the next area of support between 1.2060 and 1.2090. The upper end of this range marks the high from last year, while the lower end was a significant low back in 2012, which has now been reclaimed. So, if the trend is still bullish, price shouldn’t go below this significant support area. However, if it does then one has to consider the alterative scenario: a reversal. For us, a reversal would be confirmed if and when price takes out the low prior to the latest rally, in this case at 1.1930. Should this level break down then we could see the start of a significant correction. But for now, the trend is still bullish and in the event price takes out the aforementioned resistance range between 1.2260 and 1.2300 then we could be talking about the 1.25 handle next, with short-term term bullish objectives coming in around 1.2350 and 1.2425 – this being the 161.8% Fibonacci extension level of the last significant drop.
GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.