Dollar decline boosts EUR/USD and GBP/USD

The pullback in the US dollar basket has given EUR/USD and GBP/USD so much needed breathing space. 

Spot FX EUR/USD chart
Source: Bloomberg

$1.2450 could hinder EUR/USD progress

Even though the equity and bond markets are pricing in the political uncertainty in Greece, we have yet to see the same reaction in the EUR/USD. The pullback in the US dollar, since the exceptionally high jobs report last week, has been the major story in the currency markets over the past few days. The recent decline in the US dollar is unlikely to be prolonged, and traders will be keeping an eye on developments in Athens.

Antonis Samaras is taking a big gamble by bringing forward the Greek presidential election, and he hopes to shore up political support for his pro-austerity party. If Mr Samaras’ plan is unsuccessful he runs the risk of leaving the door open to the left wing Syriza party. The anti-austerity party is performing well in the polls and it has pledged to do undo the government cutbacks if voted into power. Any additional political uncertainty in Greece could trigger a round of selling of EUR/USD.

Tomorrow the European Central Bank will announce the targeted long-term refinancing operation (TLTRO), and one survey is expecting a take up of €130 billion. A lower-than-expected uptake could prompt fresh speculation that the ECB will begin QE in early 2015.

Resistance is likely to be encountered in the $1.2450 region, and the bears will be looking to $1.23.

GBP/USD running out of steam

The pound is making up for lost ground versus the greenback, as the US dollar basket declined in the previous two sessions after printing an eight-year high at the end of last week. The move higher in GBP/USD appears to be running out of steam, and as there is little in the way of economic announcements from the UK this week the currency pair will be US dollar influenced. The UK trade balance report today and the construction output report on Friday may provide colour to the currency markets, but I wouldn’t hold my breath.

As Alastair McCaig stated, the phrase ‘considerable time’ is a source of division at the Federal Reserve. Some members of the US central bank are keen for it to be dropped, and next week’s Federal Open Market Committee meeting may be the turning point.

GBP/USD is finding it difficult to break through $1.57 and we are seeing a lot of consolidation in this area. I feel GBP/USD is stalling here before the next move lower; $1.5640 is the initial downside target followed by $1.56.

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