Will ECB Draghi Express Concerns about Euro?

The GBP could get pounded on Thursday
USD: Stocks Consolidating, Jobless Claims Next
NZD: Unemployment Rate Drops but so Does Participation Rate
AUD: Retail Sales will subtract from Q4 GDP
CAD: Shrugs Off Sharp Rise in IVEY
Is USD/JPY Vulnerable to Further Profit Taking?

The BoE meeting is unlikely to produce any change in policy, and today’s GBP focus should be mostly on Carney’s testimony to the Treasury select committee. While we doubt that Carney will commit to anything specific on policy, he does seem likely to express a broadly dovish and activist stance, and that should be enough to maintain the soft bias to sterling. The pound may also be affected by the trade and production numbers, but the (lack of) reaction to the strong PMI services data suggests that there is more potential for a sterling negative reaction. Initial GBP/USD support is around 1.5630 but there is likely to be more support near 1.55, with resistance above 1.57. Recent EUR/GBP highs at 0.8717 offer initial resistance, with support at 0.8555.

The ECB press conference is the primary focus today, but there will also be interest in the Spanish bond auction at 09:30. Lloyds TSB expect this will be somewhat more difficult than the January auctions and may mean the EUR softens early on. However, Lloyds TSB expect Draghi to be quite comfortable with both the level of the EUR and the impact on EUR rates from the return of the LTRO money, and given some market concerns that he will try to lean against the strength of the EUR, we expect this will mean a strong EUR performance by this afternoon. The 1.3450-1.3650 EUR/USD range will be tough to break, but a positive stance from Draghi suggests that the risks of a break are more towards the top side.

The USD continues to be driven by developments outside the US, and is largely a residual of cross activity. That said, EUR/USD sticks fairly closely to the implications of forward points. USD/JPY looks to be a more technical picture, with the 94-95.30 area offering strong resistance which we expect will hold ahead of the G20 meeting next week.

After climbing to a fresh 2.5 year high during the Asian trading session, USD/JPY ended the New York session near its lows. There was no U.S. economic data on the calendar today but the slide in U.S. Treasury yields weighed on the currency. The 3.8% rally in the Nikkei should have been extremely positive for USD/JPY, especially since it was the strongest one-day move in 23 months. However after such an extensive and relentless rally that has driven the currency pair up 20% over the past 4 months, USD/JPY is reaching a level of exhaustion. It has taken out 80, 85, 90 and today 94. BK Asset Management believe that 95 will prove to be a significant level of resistance for the currency pair. The uptrend in USD/JPY should remain intact but we would not be surprised if the currency pair comes under additional profit taking and pulled back to approximately 92.25. According to one of the most popular Japanese newspapers, Prime Minister Abe is poised to select the next BoJ governor after his visit to the U.S. later this month. All 3 candidates that he is considering are doves and going into as well as on the heels of the nomination, we expect Abe and the new candidate for BoJ Governor to reinforce the central bank’s dovish message.

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