After today’s release of the Australian Labour force data for December, which beat expectations, the attention of FX traders now turns to the ECB interest rate meeting and its likely impact on the EURUSD. Also keeping the focus on Europe will be a keen interest to see if GBPUSD can continue to build on its recent rally after posting a daily close, above 1.3000 for the first time since November 2018.
Firstly, to the ECB meeting tonight, key policy settings are expected to remain unchanged with a 0.0% refinancing rate and a -0.4% deposit rate. The markets expectation continues to be for no change in interest rates until October 2019. At its last meeting in December, the ECB stated that “the balance of risks is moving to the downside” but stuck with a central case of “broadly balanced.” The data has continued to soften since then and the question is whether ECB President Draghi will acknowledge in this meeting that risks have shifted to the downside or wait for more economic data to drop in 2019, before confirming the weaker outlook.
Technically, there is not a lot to be gained from the EURUSD chart to provide further insights as to whether to expect a more dovish or less dovish statement this evening.
The move in the EURUSD to the 1.1570 high in early January was in hindsight a false break that unfortunately caught me on the wrong foot, and which does leave a negative bias in place. That said, the subsequent fall has the EURUSD back trading towards the middle of the 1.1500/1.1250 type range where it has spent the majority of the past 3 months. Really a “no fly” trading zone for directional traders.
Turning now to GBPUSD, which gained for a third day in a row. As alluded to in this article https://www.cityindex.com.au/market-analysis/brexit-withdrawal-vote-take-ii/ MP’s have taken more control over the Brexit process since the failed Brexit Withdrawal vote 10 days ago. This has sharply reduced the chances of “No Brexit” highlighted this week by Labour MP McDonnell, indicating that the Labour Party is increasingly likely to support an amendment known as the Cooper Amendment, which would require PM May to seek postponement of Brexit. EU Leaders have indicated that they are open to extension to the Brexit deadline, which is currently set at March 29, 2019.
Technically our bias remains for GBPUSD to continue higher after GBPUSD competed a medium-term low at 1.2456 in January of this year, after falling from the April 2018, 1.4377 high. The bounce from the support highlighted in the article above 1.2700/1.2660 followed by the overnight close above 1.3000, is a positive development that suggests that GBPUSD can continue to push towards 1.3200, which is the 38.2% Fibonacci retracement of the entire decline from 1.4377. Beyond that, the next upside target would be a cluster of resistance which includes the area of the 50% Fibonacci, 1.3420ish as well as the June 2018, 1.3473 high.
Also supporting the positive picture for GBPUSD is speculative accounts, who are generally more short term by nature, are according to the last updated Commitment of Trader Positioning Report, moderately short GBPUSD. More significantly, a report from Goldman Sachs published at the start of 2019, indicated about 75% of longer-term accounts which includes “real money” and sovereign wealth funds were also underweight or short GBPUSD relative to their benchmarks.
It’s safe to assume that some of these larger slow-moving funds have either begun to cover GBPUSD shorts, or are at least thinking about it, after the recent developments outlined above. This presents another reason why we continue to favour buying dips in GBPUSD with near term support now viewed at 1.3000 before 1.2930.
Source Tradingview. The figures stated are as of the 23rd of January 2019. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation
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