ECB remained on hold at 0.0% as was widely expected, however a number of dovish comments weakened the EUR substantially in the following hours. The decision per se along with the accompanying statement produced little volatility as main points included were expected, however the comment included mentioning that the bank will maintain current rates as long as needed for inflation to converge towards ECB’s target was considered as quite dovish. Despite ECB leaving a possible rate hike in late 2019 on the table, a number of Mario Draghi’s comments in the press conference caused the EUR to weaken. Of special importance would be the acknowledgement by the ECB president that the risks surrounding the euro area growth outlook have moved to the downside, on account of a persistence of uncertainties. The bank sounded quite dovish yesterday maybe even a bit surprised by the recent weak results and despite Germany’s GDP slowdown for 2018 preparing the market, the prementioned acknowledgement weighed significantly on the EUR. We expect the EUR to show some upward correction in the short term, however the bearish sentiment could weigh on the common currency, especially should financial releases confirm it. EUR/USD dropped heavily yesterday, breaking the 1.1350 (R1) support line (now turned to resistance) and the 1.1305 (S1) support level for a short period of time, before correcting above it during the Asian session today. We see the case for the pair to rise a bit further today, however it may prove sensitive to the financial releases from the Euro area and the US. Also the pair’s direction could start be influencing by expectations of next weeks Fed meeting. Technically please note that the 100 moving average clearly crossed below the 200 moving average in the 4 hour chart, marking yesterday’s bearish market. Should the pair find fresh buying orders along its path, after today’s Asian session, we could see it breaking the 1.1350 (R1) resistance line. Should on the other hand, the pair come under the market’s selling interest once again, we could see it breaking the 1.1305 (S1) support line and aim if not break the 1.1265 (S2) support level.
GBP jumps on Brexit hopes
The pound yesterday, reached one of its highest levels against the USD for the past two months. The bullish market for the pound was fueled by expectations for an agreed Brexit, as media reported that the DUP would be willing to provide support to Theresa May’s plan under certain conditions. Analysts point out that should the reports be true, chances of avoiding a hard Brexit have increased and the pound could continue to rally. We see the case for the pound to maintain a bullish momentum, as long as positive Brexit headlines continue to reel in, however we also note that the market seems to be swinging between the two extreme cases, hence increasing volatility. Cable after some hesitation, rose even further yesterday, clearly breaking the 1.3070 (S1) resistance line (now turned to support). We maintain a bullish outlook for the pair and for our opinion to change, we would require the pair’s price action to break the upward trendline incepted since the 15th of January. Please note that the RSI indicator in the 4 hour chart is near the reading of 70, implying that the pair’s long position might be overcrowded. Should the bulls continue to dictate the pair’s direction, we could see it breaking the 1.3175 (R1) resistance line. Should the bears take over, the pair could break the 1.3070 (S1) support line and aim for the 1.2960 (S2) support level.
US may provide further worries for the markets
With the US expected to be in focus in the next week (Fed interest rate decision, NFP) we would like to share some worries as a side note. As the US partial government shutdown end does not seem to be on the horizon, uncertainty seems to become more intense and possible effects could be felt on both the equities market and the USD’s direction. On the foreign policy front, the recent escalation in Venezuela could provide further uncertainty, in the near future. Especially as the confrontation between China and the US on the issue could have wider implications and overspill in the US-Sino negotiations about trade. Also a possible effect could occur in the oil market, given Venezuela’s oil production potentials.
Today’s other economic highlights
In today’s European session, we get from Germany the Ifo business climate for January and in the American session we get the US durable goods orders growth rates for December and the Baker Hughes number of US oil rigs.
EUR/USD H4
Support: 1.1305 (S1), 1.1265 (S2), 1.1215 (S3)
Resistance: 1.1350 (R1), 1.1387 (R2), 1.1425 (R3)
GBP/USD H4
Support: 1.3070 (S1), 1.2960 (S2), 1.2880 (S3)
Resistance: 1.3175 (R1), 1.3285, (R2), 1.3372 (R3)
