Quite often we see some consolidation ahead of major event risk and yesterday felt just like one of those days. With so much going on, geopolitical tensions and their associated risks, ECB due today, the fallout of Hurricane Harvey and super storm Hurricane Irma sitting just off the US coast as well as key monthly data and Trump once again discussing tax plans and extending the debt ceiling, it’s easy to see why many chose to sit on the sidelines.
In major currency pairs we saw recent ranges hold with EURUSD between 1.1900 and 1.1950, EURGBP .9126 and .9164 while GBPUSD saw slightly more active trading from 1.3018 up to 1.3082. Despite the ranges most major pairs finished the day almost exactly where they opened. The USD was weaker through the early morning session and while it lost ground against EUR and GBP, it did manage to rally against JPY through the day helped by news Trump and Congress agreed to extend the debt ceiling out to December. The outperformer on the day was CAD, following the surprise interest rate hike which saw the BOC raise rates by 25bps to 1% catching the market off guard and sending CAD surging. It was a choppy day in stocks, Germany led European indices higher but trade remained cautious and US indices recovered from early losses to trade marginally higher, albeit with a cautious tone.
Today is all about the ECB for markets and there are plenty of variations of outcomes that can potentially occur. The ECB are due to release their rate decision and asset purchase target this afternoon and while markets have been building up anticipation for tapering, resulting in the surging euro through summer, they may not get that this week. Many feel today’s meeting will be used to lay the groundwork for the October meeting, since the ECB had previously said they’d look to make a change in Autumn. We’ve seen the euro face selling since last week as profit taking took hold following the +10% rally from May however the single currency is in demand once again this morning. One of the key things we’ll be looking for today is if Draghi and the ECB comment on the recent strength of the euro and if that impacts their plans to scale back asset purchases. We will also be interested to see if any discussion takes place on how long an extension to QE will be, even if it is at a lower €40bln per month. If the euro is to continue its rally higher we need the ECB to avoid commenting on euro strength, while still standing behind the plan to taper their asset purchases. In order to do this they will need to convince the market that the Eurozone is ready to face scaling back of easing and convince markets of updated inflation figures. Considering the 10% rise in euro since their last inflation guidance and a subsequent slowdown in price growth, this might be a difficult task and it feel like Euro selling will result unless the ECB maintain their hawkish positioning.
EURUSD looks towards support around 1.1860 area for early support, while euro sellers around 1.1980 and above at 1.2070 likely to be areas of resistance to moves higher. A break back below 1.1665 is really needed for EURUSD to turn bearish and while that may not occur today, a more subdued ECB could certainly start the process. EURGBP has been trending lower since the top on August 29th, however is still remains firmly in the rising channel in place since May and a break sub .9070 is required to really begin a downward move. Next level will be the .9000/.9030 range, a break below there and we will be confirming a turnaround in EURGBP.
GBPUSD now holding firm above 1.3000, support now at 1.3020/30 area. Yesterday’s highs at 1.3084 offers some resistance while 1.3120 area attracts above that.