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GBP and EUR Take a Dip Before Central Bank Meetings Print E-mail
Daily Forex Fundamentals | Written by | Mar 06 13 15:19 GMT

GBP and EUR Take a Dip Before Central Bank Meetings

There is an unusually large amount of uncertainty as we lead up to the ECB and BOE meetings tomorrow and it is being reflected in price action today. EURUSD and GBPUSD have been drifting lower throughout the London Session and were given another push lower by the ADP report that edged closer to the magic 200k number. This helped the dollar to extend recent gains; interestingly the dollar is rising alongside stocks. European stocks are higher for the second day, even if gains are more moderate after yesterday's uber-rally. US stock have also opened higher.

The question now is whether or not stocks are due a sell off after reaching these lofty heights. Yesterday's rally across US markets was impressive. Even the Russell 2000 index, a mid-cap index that is often considered a lead indicator, made a leap higher even though it looked like bullish sentiment was waning earlier this week. Niggling concerns like low volume and global economic uncertainty are still there, but the best route to take is to follow the price action. Right now the daily charts look like there could be further upside, although the shorter term charts are starting to look overbought. Thus, we may see a short term pullback before fresh longs come back into the market.

Stocks in the sweet spot

The economic data has been supportive of stronger US markets today. The ADP employment data for February beat expectations of 170k, to rise by 198k. Added to this the Jan figure was also revised to 215k, which suggests that in the private sector the labour market is a picture of health. The economy may be firming (there was also good news from yesterday's ISM non-manufacturing report) but the Fed doesn't look like it is anywhere near starting to withdraw monetary policy. The trouble is when you are buying $1 trillion of Treasuries and MBS's per year is that you can't just turn the taps off overnight. The Fed's QE programme is an enormous juggernaut that takes a long time to change direction. The end of QE could lag the economic recovery, which is why US stock markets are at these elevated levels: because we are in a sweet spot for equities where growth is strengthening and rates are low. This is also dollar positive. If we see payrolls follow ADP higher, it could trigger a broad-based rally in the greenback at the end of this week.

ECB and BOE drain sentiment for EUR and GBP

The market's other focus today has been the GBP and EUR. These currencies have had shallow recoveries after sharp sell offs at the end of last week; however they have drifted lower today as investors wait for the BOE and ECB meetings tomorrow. EURUSD is still managing to hold on to 1.30, but the backdrop remains fragile for the single currency. Two things will determine its medium and long term direction: it will be weaker in the medium-term if 1, the ECB takes more policy action this week and 2, payrolls are strong fuelling a move higher in the dollar. In contrast, the euro could strengthen if 1, the ECB remains on hold and 2, payrolls are not strong enough to warrant a rise in the dollar. A mixture of these two scenarios could cause EURUSD to hover between 1.2950 and 1.3115 - the base of the daily cloud - in the near term.

One to Watch: GBPUSD shuttling down the 1.40 highway...

GBP has also drifted to the lows of the session close to 1.5060. 1.50 remains a near term bottom after finding support there earlier this week. The bearish case for GBP remains intact from both a fundamental and technical perspective. The economy is still weak and may require years of QE/ low rates before it improves- this could require even more radical action from Governor elect Mark Carney. From a technical perspective, 1.50 still looks vulnerable and we expect any recoveries to be shallow in the short term. Key resistance lies at 1.5220, while support lies at 1.50 (for obvious reasons) and then 1.4950 ahead of 1.47. The trouble with the pound is that when it moves, it really moves, so if we do decisively break below 1.50 there may not be that many pit-stops as we shuttle down the 1.40 highway.


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