US Dollar and the British Pound rally against a weak Euro

Nov 18 2015, 7:30 am
Euro coin

The Single currency’s decline in the past week is evidence of a major pricing in factor ahead of the December ECB meeting. The single currency declined nearly -5.62% against the British Pound while losing -6.27% to the US Dollar over the past 6 weeks since the ECB’s meeting where Draghi hinted on potential easing when the board convenes in December. The stark monetary policy divergence has left the Euro vulnerable against the strong Greenback where the markets are coming to terms with the inevitable December rate hike. Against the British Pound, EURGBP’s descent highlights the fact that the UK’s economy is in a much better position and despite the recent downward inflation forecasts; there is scope for the BoE to remain hawkish over the medium term in anticipation of rate hikes.

Yesterday’s consumer inflation numbers, released from the US and the UK highlighted the fact that the markets are finally starting to show inflationary pressures. Across the board, including the Eurozone, inflation has managed to tick higher. While this could potentially put to question on whether the ECB will act in December, it is evident from various ECB officials that if not for a QE expansion, there is a strong support for further monetary policy easing including a sharp deposit rate cut taking rates deeper into negative territory.

EURGBP – Technical Outlook

On the monthly charts, EURGBP is trading in a range within the highs and lows of 0.7483 – 0.6936 with the current price action trading below a 4-month lower close. A break below 0.6932 will likely push the EURGBP further down to the longer term support zone to 0.6607. Plotting the median line on the monthly charts, EURGBP is currently close to the median line having tested and bounced off on previous occasions. The bias remains to the downside for EURGBP considering the monthly October candlestick pattern which resulted in a strong bearish engulfing pattern pointing to a decline in the near term. EURGBP could likely see price stalling near the 0.7031 through 0.6936 region in the near term. As long as monetary policy continues to point to a dovish ECB, the EURGBP could be looking at sharp declines on break below 0.69362.

EURGBP - Monthly Chart
EURGBP – Monthly Chart

EURUSD – Technical Outlook

For the EURUSD, price action is now in the longer term support zone trading below March lower close at 1.0730 and the corresponding lows at 1.04615. Prices are consolidating near the median line and a monthly bearish close below 1.04615 could see a renewed bearish momentum see prices decline to as much as the lower medina line, taking EURUSD sharply below parity. In the unlikely event that EURUSD stalls at the current support levels, any bounces are likely to keep prices range bound within the resistance of 1.1306. Only a close above 1.1306 will see a rally to the outer median line where there is strong resistance near 1.231 – 1.204. However, the likelihood of such a strong rally is unlikely at this point in time.

EURUSD Monthly Outlook
EURUSD – Monthly Chart

For the moment, the Euro remains a strong favorite for the bears until the fundamental outlook shifts in favor of the Euro which is unlikely to happen any time soon.

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John has over 8 years of experience specializing in the currency markets, tracking the macroeconomic and geopolitical developments shaping the financial markets. John applies a mix of fundamental and technical analysis and has a special interest in inter-market analysis and global politics.

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