BOE’s Super Thursday festivities could set the tone for EUR/GBP's next big move
Matt Weller, CFA, CMT January 13, 2016 2:40 PM
So far, today’s price action has broadly followed the script laid out in the first part of the week:
- China’s stock market traded lower overnight as the PBOC left the CNY’s fix essentially unchanged
- European and US stocks opened higher, only to see those gains evaporate ahead of the European close
- Oil is falling once again, leading to weakness in commodity currencies and risk appetite as a whole
- The US dollar index is rising marginally on the continued global uncertainty
It remains to be seen whether we’ll see a late-day rally to bring US equities back into positive territory (given the extent of this morning’s selloff, it’s going to be tough), but so far, today’s trade has been rather "ho-hum" on the whole.
One currency pair that’s poised for a potentially big move one way or another in the latter half of this month is EUR/GBP. The European pairing has been on a tear lately as traders continue to push back expectations of BOE tightening; now the market is not expecting the central bank to raise interest rates until May 2017 , a big change from the expectations a few months ago, when even the pessimists assumed the Carney and company would raise interest rates in 2016.
With both the Eurozone and UK economy struggling, EUR/GBP traders will closely monitor the relative changes in major economic indicators moving forward, as well as the geopolitical risks on the horizon (cough Brexit? cough).
From a technical perspective, EUR/GBP is at a particularly precarious level. The pair tagged a new 11-month high above the .7500 level on Monday, but bulls have failed to confirm the breakout by pushing rates definitively higher. That said, we can’t necessarily call the move a false breakout either as the unit is still consolidating above previous resistance near the .7500 level. The most-watched secondary indicators are turning in a split decision of their own, with the MACD trending higher above its signal line and the "0" level, showing bullish momentum, while the RSI indicator is currently in overbought territory and showing a possible bearish divergence.
While we can’t fault readers for trading EUR/GBP in either direction at this point (as long as they’re using stop losses and good risk management techniques), the most prudent strategy may be to wait for the pair to "pick a direction" before committing too strongly. For instance, if EUR/GBP rallies to close above Monday’s high at .7555, it would tilt the odds in favor of more strength, potentially up toward the 38.2% Fibonacci retracement of the entire 2013-15 drop near .7650, if not higher.
On the other hand, a move back below the .7420 level that marked Monday’s low would indicate that the bears are finally stepping in to defend that key resistance level and could open the door for a dip back toward the middle of the recent range around .7200 or even long-term support near .7000. Of course, tomorrow’s BOE "Super Thursday" festivities could have a meaningful impact on the pair so if the initial move following the central bank’s latest proclamations is maintained, it could set the tone for the next couple of weeks’ worth of trade in EUR/GBP.
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