Market News & Insights
25 January 2018

Euro Vulnerable If ECB Don’t Back Up Minutes

The rise of GBP continues and at this point everyone is shaking their heads asking how long this can continue. The fact is very little has changed in the fundamental environment for GBP over the last 10 days yet sterling is up almost 6% vs USD. We saw GBPUSD briefly trade back above 1.4300 this morning and technically it could go as high at 1.4460 where we opened the week trading on the Brexit vote week. The spike higher this morning has seen a very quick correction and technically 1.4250 has been a key level back as far as 2009 and a step back below there could finally see the top in place. The background of this has been also on huge USD weakness, the dollar index trading down to key support, bouncing off support in place from December 2014. The USD index is down over 3.5% in Jan.

The stronger GBP saw EURGBP drop lower, back below key support between .8730/60 area and now flirting with a move back below .8700. The .8600 to .8730 area has been a make or break zone for EURGBP since Brexit, failure to hold below .8700 has seen a bounce back towards the highs but a break favours a press into post Brexit lows towards .8300 area. We do tell a slight lie, the pound’s rally has been aided by the closing of the gap on negative wage growth. Weaker inflation last week and stronger wage growth this week favour the pound but we may well see some sterling selling and profit taking as corporates take advantage of these lofty levels to sell GBP, while other traders take profits on the move higher ahead of tomorrow’s Q4 GDP print.

ECB takes center stage today and as we’ve been pointing out all week the euro probably needs to shift its language or certainly sound less cautious than they have in the past, should the single currency have hopes of extending gains. Any concerns around inflation remaining sticky will weigh and given the lofty rise in EURUSD and the broader press higher for the euro since the last meetings minutes, it will be very interesting to see what tact Draghi & Co take. Concerns about the value of the euro may well be a growing concern but ECB usually avoid targeting the euro’s value directly.

Not much due from the US, Advanced Good trade balance and some other second tier releases. Donald Trump heads to Davos where the world economic forum is taking place. Mnunchin’s comments from there yesterday was enough to begin the dollar slide so it’ll be interesting to hear if the President has anything to say on the greenback’s value, broader trade and whatever else may cross his mind. EURUSD sits at three year highs, key resistance at 1.2490 is the level for moves higher, while 1.2205 now proves support.