Morning Report: Draghi & The Dollar

Having started positively at the LDN open yesterday, breaking to the upside initially before tumbling and ending the day over 100 pips lower as Mario Draghi’s words were once again, the cap on euro upside. Pledging to boost inflation, Draghi reiterated that the Bank is willing to enact more monetary stimulus if needs be, thus putting the EU situation in stark contrast to that of US and GB where the respective Central Banks are considering tightening their monetary policies. With a worsening economic outlook in German there appears increasing risk to the Eurozone economy. Current easing measures, and indeed, even Draghi’s verbal interventions, may prove too little to lift growth and inflation significantly and market sentiment seems heavily orientated towards further ECB easing.

Technically, having failed to break back through the 61.8% retracement level at 1.2785 and having broken through the early trendine formation from the NFP lows, the pair could look to test horizontal support at the 1.2580. We noted earlier in the week that with Daily On Balance Volume still heavily down, a continuation lower would not be a surprise and unless initial support is held, the NFP low looks to be in peril. Daily Order Book Regression & Psychology Indicators both turning down at this point.

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With an initial USDJPY bounce yesterday on better US jobless claims data having waned overnight as FED comments highlighted the fact that policy outlook remains data dependent, the correction in this pair still looks intact. Disappointing data out of Japan had little impact on JPY which seems supported by increasing risk aversion and changing policymaker attitudes on JPY.

Technically, the retest of the 105 breakout level is still up for grabs though with Daily Order Book Regression & Psychology Indicators turning higher there is room for a retest of the consolidation lows at a minimum, before further downside manifests. However with USD making something of a recovery at this stage, a proper retest of highs cannot be ruled out.

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With the BoE “rates unchanged” somewhat of a non-event yesterday GBPUSD followed the Euro in registering a promising day gone south. With the USD putting in a modest recovery currently, It appears again that the NFP low is in peril. Main focus will be on speakers today with Fed’s Plosser, Lacker & George (considered to be hawks) speaking.  On the data front, today’s releases saw the UK’s trade deficit narrow more than expected in August as imports fell at an even faster rate. UK Construction however, fell sharply too in August with -3.9% m/m and -0.3% y/y – dropping for the first time on the year since May 2013.

Daily Order Flow Indicators again suggest downside as the next likely move. With the Fed’s concern about the strength of the USD and positioning and with analysts differing on the timescale of a Boe hike it is possible that we consolidate at this level before making any meaningful break either way at which point we will have a clearer picture of best next steps.

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