EUR/USD and EUR/GBP decline ahead of ECB decision

EUR/USD and EUR/GBP lost ground overnight as the rate decision from the European Central Bank weighs on the single currency.

ECB sign outside the headquarters
Source: Bloomberg

EUR/USD eases overnight

After opening higher on Sunday from Friday’s close EUR/USD has given up most of the gains it made, and the single currency has struggled to maintain rallies for a considerable amount of time.

The ECB rate decision and press conference on Thursday will be the main event of the week. The rate at which Mario Draghi has alluded to QE has been increasing, but so has Germany’s opposition to such a scheme. Sabine Lautenschlaeger, who represents Germany on the ECB’s board, echoed Jens Weidmann by vocalising her resistance to the idea of adding government bonds to the purchasing list.

I foresee Germany being against full blown QE while the economy is growing, even if the growth rate is minuscule. The government bond market is pricing in QE, but I feel Mr Draghi will continue to talk the currency lower without acting on his hints.

EUR/USD has declined for the past five months in a row, and with the divergence in the two economies I see no sign of the downward trend letting up.

Federal Reserve members William Dudley and Stanley Fischer are expected to deliver a speech in New York at 5.15pm and 6pm (London time). Both members sit in the dovish camp, and if neither changes their tune we could see a further pullback in the US dollar.

The euro is encountering resistance at the 50-hour MA of $1.2457. As Alastair McCaig stated, $1.24 has acted as support recently so that level is the near-term target. As I previously mentioned, only a move through the 50-day moving average of $1.2571 would help bring an end to the downward trend.

Spot FX EUR/USD chart

EUR/GBP edges lower

This week dealers will be keeping an eye on the other interest rate decision, which is expected from the Bank of England on Thursday. No change to rates or the asset purchasing schemes is anticipated, but the statement which will follow will reveal the mood on Threadneedle street.

Traders are penciling the second half of 2015 for a rate rise from the BoE; it is not just the ECB that is worried about falling inflation. The collapse in the price of oil, following the OPEC decision to keep production unchanged, is likely to make Mark Carney’s prediction about UK inflation falling below 1% in the near term a reality.

The PMI reports which measure manufacturing and services are due out at this week from the eurozone, and should provide volatility in the run up to Thursday’s rate decisions.

EUR/GBP has been in a downward trend since July 2013, although the selloff ran out of steam at £0.78. The £0.79 level is the initial downside target and EUR/GBP is likely to run in to resistance at the 200-DMA of £0.7990.

Spot FX EUR/GBP chart

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