FX recap: No surprises from central banks; EUR/USD hits resistance

<p>Generally speaking, the FX markets are likely to be directionless until the Federal Reserve’s much-anticipated policy meeting next Wednesday. However, some currencies like the Australian […]</p>

Generally speaking, the FX markets are likely to be directionless until the Federal Reserve’s much-anticipated policy meeting next Wednesday. However, some currencies like the Australian dollar, which took a boost from another surprisingly good jobs data overnight, could begin to perform better. The euro meanwhile has been dragged lower, in part because of dovish comments from a couple of the ECB staff. The slightly firmer stock markets have also caused the funding currency to weaken. But the main reason for the EUR/USD’s weakness may be explained away by looking at the charts (see below). If this view is correct, the EUR/USD could start to strengthen once more given last week’s events.

No surprises from Central Banks today: BOE, SNB and RBNZ

Meanwhile, there were no major surprises from the Bank of England today, with rates and QE unchanged and McCafferty again being the lone dissenter in calling for a rate rise. The BoE did sound a bit more dovish according to the minutes however and this was the reason for the pound’s quick 50 pip drop. Among other things, it said fiscal plans will continue to weigh on growth, while risks to inflation are ‘a little to the downside’.

Today’s other major central bank meeting was the Swiss National Bank, which also decided to keep its policy unchanged, perhaps disappointing a few people who were expecting another cut in interest rates there. In truth, this was unlikely to happen given the ECB’s decision last Thursday not to expand the size of its monthly asset purchases. Unsurprisingly, the SNB was vocal about the CHF being overvalued and again warned that it could intervene in FX markets if needed.

Meanwhile the Reserve Bank of New Zealand decided to cut rates further to 2.50% from 2.75% as expected. However after a quick drop, the NZD bounced strongly as the RBNZ signalled the end of near-term easing. The NZD/USD was still holding near its overnight highs at the time of this writing.

Technical outlook: EUR/USD

The EUR/USD’s first attempt at the 200-day moving average was rejected yesterday, leading to a decline of about 100 pips from the high. At the time of this writing, the world’s most heavily-traded FX pair was testing support around the 1.0940/50 area. This was previously resistance and corresponds with the 50-day average. The support range could be further lowered to around 1.0900 given the past behaviour of price action around these levels. If however 1.0900 breaks down then the EUR/USD could drop back to the pivotal 1.0800/20 level before deciding on its next move.

But the EUR/USD is likely to find some support around the levels mentioned above given the recent developments. So, we may see at least a short-term bounce later in the day. There is also the potential for a more significant rally which could see price take out the 200-day average more decisively this time. After all, there may be further momentum left in the upsurge we have seen since Thursday, with the EUR/USD also creating a large bullish outside candle on its weekly chart.

If the EUR/USD does rally above the 200-day average then the bulls may aim for the previous support and 50% retracement level as their next target, around 1.1100/20. Slightly above this level is the bearish trend that has been in place since May 2014. This is where we ultimately think the rally will run out of juice.  Obviously if it doesn’t then this could give the bulls fresh impetus to maintain or increase their positions, leading to an even stronger rally.

15.12.10 eurusd

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (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.

For further details see our full non-independent research disclaimer and quarterly summary.