Weekly Analysis: Last week the ECB announced they’ve reduced inflation expectations for 2017 and the years to follow. This was the main reason for a drop seen Thursday but other than that, price action was choppy and without clear direction.
The pair retraced after reaching a high at 1.1283 and moved below 1.1240, showing increased bearish pressure. The Relative Strength Index reached its 70 level several times during the last period, becoming overbought and showing bearish divergence (price is making higher highs while the oscillator is making lower highs). These facts, combined with the ECB stance on inflation, make us believe that the pair is headed lower, possibly into the 50 days Exponential Moving Average. The first hurdle is the support at 1.1120 but if price bounces higher from there, we may see another encounter with 1.1240.
The week starts slow, without any major indicators released on Monday but Tuesday action picks up with the release of the German ZEW Economic Sentiment and U.S. Producer Price Index. Both releases have the capacity to move the currencies strongly, but the impact is lower if the actual number matches expectations.
Wednesday will be a big day for the US Dollar because 3 major releases are scheduled: the U.S. CPI (key inflation gauge), the U.S. Retail Sales and the Fed will announce the interest rate which is expected to increase to <1.25% from the current <1.00%. All this is likely to generate increased movement on all US Dollar pairs, so caution is recommended.
Thursday is a slow day for both the US Dollar and Euro and the trading week ends Friday with the release of the European Final Consumer Price Index and the University of Michigan Consumer Sentiment, which is a survey that tries to gauge the confidence of consumers in economic conditions.
The British Parliamentary Elections resulted in a hung Parliament, meaning that the Conservative Party won but didn’t manage to take enough seats to establish a majority. This triggered a sharp drop for the Pound and a break of several support levels.
Given the current political situation in the United Kingdom, the Pound is likely to continue to weaken and to head into the next support located at 1.2570. The pair is now trading below two important levels (1.2850 and 1.2770) and below the 50 days Exponential Moving Average so the bias is bearish from a technical standpoint as well as fundamental. However, this is still a high-risk pair and we recommend caution trading it.
The first important release for the Pound is the British Consumer Price Index, scheduled Tuesday. The indicator is the main gauge of inflation and shows changes in the price that consumers pay for the goods and services they purchase.
Wednesday’s highlight is the release of the Average Earnings Index, an indicator that shows changes in the price paid for labor by businesses and Government. The last major event of the week for the Pound is the announcement of the BOE interest rate, along with a Monetary Policy Summary, scheduled Thursday. As always, the U.S. events will have a direct and possibly strong influence on the pair’s direction.
Written by: Bogdan Giulvezan