European Open Spread of COVID Delta Variant Weighs on Sentiment

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.