The GBP/USD pair rose to a high of 1.5507 as the UK retail sales surpassed expectations by a big margin, before erasing gains and falling to 1.5369 amid sell-off in the EUR/USD pair and upbeat US weekly jobless claims data. The ECB President Draghi caught markets by surprise with his extremely dovish talk and led to a sell-off in the EUR and in the other European majors including Sterling. Still, the Cable managed to take back part of its losses and close above strong support at 1.5387, ensuring the bullish view remains intact.
keep an eye on 2-yr UK gilt yield
The UK economic calendar is empty today, so the focus is likely to be on the moves in the EUR/GBP cross. The slide in the EUR/USD could gain speed today in case the preliminary PMI reports disappoint, thereby leading toa further drop in the EUR/GBP and strength in the GBP/USD pair.
Traders should also keep an eye on the two-year UK gilt yield. After the Draghi’s dovish talk, the German 2-yr yield fell to record lows. US 2-yr yield also suffered losses, while UK 2-yr yield erased gains. Moreover, the ECB’s ultra dovish stance could force the BOE to play down rate hike bets and the hints of such a dovish turn by the BOE could be seen in the 2-yr UK yield. Losses in the 2-yr yield could cap gains in the GBP/USD pair.
GBP/JPY & GBP/CHF poised to rally?
At the moment, the GBP/JPY cross is increasingly looking positive. After ECB’s ultra dovish stance, the pressure on the BOJ to act would be on the rise. The pressure in more on the SNB, while the BOE is still relatively hawkish (more hawkish than the Fed). Hence, the probability of a rally in the GBP/JPY and GBP/CHF crosses is high.
GBP/CHF took out the falling trendline resistance on the daily chart on the closing basis yesterday and appears poised to break above 1.5118 (Sep 22 high). GBP/JPY also ran through offers around 185.50-185.60. The pair now appears poised to test 186.35 and 188.17 levels.
Technicals – Resistance at 1.5440
Sterling’s drop to 1.5369, followed by rise in Asia today above 1.5387 (Oct 13 high) indicates the currency is likely to extend gains to 1.5440 (falling trend line resistance on the daily). A break above the same would expose 1.55 handle. Moreover, a daily close above 1.5440 would add to bullish momentum. On the downside, failure to rise above 1.5440, followed by a drop below 1.5387 would be a sign that bears have regained control and the spot could travel lower to 1.5355 (38.2% of 1.5107-1.5509) and 1.5530 (200-DMA).
EUR/USD Analysis – 1.10 or sideways action?
EUR/USD suffered more than 2% drop on Thursday after the ECB President Draghi’s deposit rate cut talk and revision of the QE program in December caught markets by surprise. Jawboning of the EUR was widely expected and also priced-in since last Thursday to some extent. However, almost no one in the market, including me, was expecting Draghi to talk about the deposit rate cut. The pair fell to a low of 1.1071, before moving above 1.11 handle in Asia today.
Risk of further sell-off on weak PMIs
The preliminary PMI numbers for October are due for release today. As said earlier, a majority in the markets did not expect such a dovish talk. Many, including me in the ECB preview, also said more QE is not required, since PMIs are ticking higher while the confidence indicators are solid. However, if the PMIs drop today, the need to do more would be underscored further, leading to a drop in the EUR/USD Pair towards 1.10 levels. On the other hand, upbeat PMI figures could trigger a corrective rally (profit taking on shorts heading into the weekend).
The equity markets across the globe cheered Draghi’s dovish talk. So there is little probability of a risk aversion and the rise in the EUR today. However, commodity prices could play a spoil sport and keep cap gains in the equities. Overall a sideways action is likely today, so long as the equities don’t turn red and PMIs do not disappoint.
Technicals – Supported by the rising trend line
Euro found support of the rising trend line on the daily chart (represented by indigo line) located at 1.1070 and rose back above 1.10 levels. The recovery also kept 50% fib (of Mar to Aug rally) support at 1.1088 intact. However, the upside is being capped around the 200-DMA at 1.1122.
Despite the sharp sell-off, the daily chart says the rising trend since March low is still intact. Only a daily close below 1.1070 would mean a possibility of a move below 1.10 levels next week. On the other hand, the stage appears set for a corrective rally ahead of the weekend. The immediate upside appears capped around 100-DMA at 1.1174.