Weekly Analysis: The US Dollar finally had a good week, strengthening against the Euro and breaking the bullish trend line seen on the Daily chart. The main catalyst was the better than expected U.S. Consumer Price Index, released Friday.
After a relatively long period of indecision, the pair finally managed to pick a direction and we expect this impulse to continue. Now the 50 days Exponential Moving Average and the bullish trend line are broken and this makes the bias bearish but keep in mind that 1.1150 is not clearly broken so there’s still a chance of a bounce here. We favor the short side and a move into the 1.1000 area but if current support holds, we expect another encounter with 1.1240.
As usual, the first day of the week will be slow in terms of economic releases but action picks up Tuesday with the U.S. Building Permits. More permits means that activity in the construction sector will increase and this usually strengthens the greenback but the impact is not always very high.
Wednesday will be the busiest day of the week for the US Dollar as the Fed will announce the interest rate decision and will release a FOMC Statement outlining the reasons that stood behind the rate vote. Soon after the announcement, Fed Chair Janet Yellen will hold a press conference during which we expect increased volatility.
Thursday ECB President Mario Draghi will speak at the European Systemic Risk Board, in Frankfurt and the on the US Dollar side the Existing Home Sales will be the only notable event. The week ends Friday with the release of the German Manufacturing and Services PMIs, which are medium impact indicators but can have a positive effect on the Euro is they show higher numbers than forecast.
The Pound closed last week at its weakest point since August 17, with Friday being the worst day of the week. The pair dropped more than 250 pips on the back of comments made by U.K. Chancellor of the Exchequer Philip Hammond regarding the willingness to give up Britain’s single-market membership in the European Union in order to achieve immigration restrictions, according to Bloomberg.
The key support at 1.3070 was broken by a strong candle and the fundamental scene doesn’t favor the Pound, while the US Dollar benefits from a stronger than expected CPI (inflation data). In the current scenario the fundamentals and the technical aspect point towards the downside for the pair and this makes our bias bearish, anticipating a move into 1.2865 zone.
We don’t expect price to travel in a straight line to get there so it’s very possible to see some sort of bullish retracement, at least on the lower timeframes. The first potential resistance is now 1.3070, followed by the 50 period Exponential Moving Average.
The entire week lacks any major news releases for the Pound so the US Dollar events will hold the headlines. Worth mentioning is the release of the Public Sector Net Borrowing, scheduled Wednesday; the indicator shows the difference between spending and income for public corporations and the government. A number above zero shows deficit so the higher the number the bigger the deficit. This indicator is not known to be a major market mover but it may increase volatility because the week lacks other important indicators.
Written by: Bogdan Giulvezan