General market theme
The ECB meeting was the main focus yesterday amongst traders, and the central bank’s decision to potentially lower rates along with their future guidance. We have discussed the possibility that the ECB will avoid raising rates at this time as there is not enough evidence of deterioration in the area to suggest lower interest rates, and indeed Mario Draghi and co. left rates at their current levels.
However, the lack of any future guidance on how the central bank expects to proceed in the near future didn’t allow the euro to climb higher as investors remained bearish. We should expect more volatility coming our way in the next weeks as this development did nothing to clear things up but rather added more uncertainty in the markets.
Price action highlights
The euro spiked higher above the 1.1050 level initially as the ECB left rates unchanged, but the move didn’t last long as the lack of any future guidance meant that there was no follow-through for the currency, and instead the flows reversed and fell below the 1.1000 area again.
During the course of the US and Asian sessions the euro recovered above the 1.1000 region again, which proves the pivotal role of this area. However, the uncertainty surrounding the euro at this time makes it hard to predict what the next move will be.
The single currency retains its bearish tone against the dollar, as even though the ECB will not lower rates yet and the Fed will also remain non-committal, the sentiment in the medium term is towards the US currency.
The cable pushed lower yesterday on the back of the bearish Retail Sales report from the UK, but the decline didn’t last long and more importantly didn’t drive the rate below the 1.3150 support level.
This should not make us believe that suddenly the bias in the pound has changed as this is not the case, and we could see further weakness in the UK currency today as the PMI levels are to be released. Analysts expect a considerably lower reading and that could again put the pound under pressure and send it towards its below-1.3100 lows before the end of the week.
Focus of the day
There are a few important reports pending for release today from the UK and the Eurozone and we could see some volatility in the price action of the major instruments on the back of them. The PMI levels for the euro area and the UK are expected to reveal a broader weakness in the area post-Brexit, and this could be the first evidence of its negative effect.
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