Price action during the first 24 hours of this week remained on the same themes we discussed in our previous report and the major instruments we cover in this newsletter traded the way we expected them to. There was nothing significant on the calendar to spark some controversy so traders remained cautious and happy to remain firm to their currency positioning.
The most highly expected event of the week is the meeting of the ECB and the press conference that will follow on Thursday. It is widely believed that we could have a change in the current easing program from the central bank or at least a stern warning from ECB President Draghi that they stand ready to further increase stimulus if needed.
The Euro is already on a bearish ride ahead of the meeting as traders expect some kind of action from the ECB and truth be told the Single currency had enjoyed a free ride higher in recent times on the back of the bearish US Dollar. However it seems that problems can’t be disregarded for long and with the Euro area deep in low inflation and lack of progress across most sectors the Euro is vulnerable to losses.
From a technical point of view the 1.1300 area is obviously the first target and a further pressure lower from a bearish ECB meeting 2 days from now could send the currency towards the 1.1200 lows. Lack of any news or pending reports today could mean a sluggish reaction from the Single currency but the bias remains to the downside and we see no risk for a reaction higher.
Unlike the Euro, the Cable moved higher yesterday and we have explained in our previous report that there is a clear divergence in the outlook of the two European currencies. The Pound looks robust enough to remain afloat around the 1.5500 area for the time being and while the Dollar could on the backseat for the entire week we could see an upwards break of this ceiling in the next few days.
The domestic economy is faring well and after the recent bullish employment data the Cable has a clear bullish bias but lacks the proper stimulus and momentum to overcome the 1.5500 resistance level. We believe that the upcoming Retail Sales report could provide said stimulus and allow the UK currency to clear this level and establish a foothold above it.
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