EUR/USD Selling Pressure Takes A Breather

The major story from Wednesday involved Russia and Ukraine reaching a ceasefire. Immediately, this increased confidence from investors in the EUR/USD which has suffered due to the ongoing conflict in recent months. Following the breaking news, the EUR/USD increased by nearly 40 pips and concluded trading at 1.3149. Today, the latest European Central Bank (ECB) interest rate decision is scheduled, followed then by ECB President Mario Draghi’s press conference. Succeeding Friday’s news that EU inflation levels were edging towards five-year lows, there are suspicions that the ECB may add further stimulus measures today.

However, there remains a strong argument that the lower inflation levels last month were due to a drop in energy prices, alongside an oversupply of oil. I expect the ECB to leave monetary policy unchanged this month. In which case, the major risk to the EUR/USD valuation might be the Draghi press conference. Last month, Draghi appeared relaxed but calmly expressed that the “fundamentals for a weaker exchange rate are better now than a few months ago.” He was proved correct with this assertion, with a streak of negative EU economic releases throughout August leading to the EUR/USD declining by nearly another 200 pips.

If Draghi indicates that further stimulus, including a possible introduction to quantitative easing (QE) remains at the central bank’s disposal, additional pressure on the EUR/USD should occur. In which case, support can be found at 1.3136 and the current yearly low, 1.3109.

The Cable declined again on Wednesday, despite another impressively strong performance from the UK economy. The latest UK Services PMI (The UK’s largest GDP contributor) was at its highest in 10 months, following a similar performance from the UK Construction PMI the day prior. Still, the GBP/USD fell by as many as 60 pips throughout the day, before concluding trading at 1.6460. At one point, the GBP/USD traded as lowly as 1.6439 which represents the lowest Cable valuation since the 12th February.

The selling pressure in the GBP/USD was again correlated towards the upcoming Scottish referendum and, although I understand the prospect of political instability would create unease among investors, I still think there is another factor behind the Cable’s decline this week. The Bank of England (BoE) are all but confirmed to keep interest rates unchanged today and there could be an assumption among investors that no matter how consistent UK economic performances remain, the BoE will refuse to raise rates. If selling pressure continues today, the GBP/USD could find support at 1.6439 or the 26th March low, 1.6509.

As expected, after appreciating by over 200 pips since surpassing the 103 psychological resistance level, the USD/JPY began to pullback yesterday. The pair dropped around 60 pips from the daily high (105.301) to the daily low (104.734), while concluding trading at 104.779.

This pullback was encouraged by the overnight monetary policy statement Bank of Japan (BoJ) revealing that stimulus measures remain unchanged. The BoJ have maintained confidence that despite the April sales tax leading to a substantial decline in consumer/household spending its monetary goals (particularly inflation) remain achievable.

More negative Japanese economic releases showing the detrimental impact the sales tax is having on expenditure is required, so that further pressure is placed on the BoJ to add further stimulus. In my eyes, this holds the key to a further USD/JPY bull run.

Finally, it may have been a slightly delayed reaction but investors finally began to react favorably to Tuesday evening’s Australian GDP data. The Aussie increased by nearly 90 pips from the daily high (0.9350) to the daily low (0.9261) before concluding trading at 0.9345.

The delayed reaction may have been linked due some of the Reserve Bank of Australia’s (RBA) warning signs from as far back as April being correct. The central bank warned that the Australian economy was set to enter a period of weaker economic growth and there were some signs of accuracy in regards to this. For example, quarterly GDP growth was recorded at 0.5% in contrast with 1.1% in the previous quarter. However, annualised GDP growth at 3% remains impressive and investors have clearly looked positively upon this.

There are no major releases scheduled for the remainder of the week in Australia. Therefore, after Wednesday’s appreciation in value the Aussie may now be susceptible to a pullback. In which case, potential support could be found at 0.9320.


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