Forex snapshot

EUR/USD and GBP/USD spent the overnight session clawing back losses as the US dollar runs out of steam.

Euro and US dollar notes
Source: Bloomberg

Euro eyes $1.25

The euro suffered a sharp fall at the beginning of the overnight session, but the single currency has been recouping its losses as it heads towards $1.25.

The move overnight night was driven by traders taking their profits following the recent US dollar surge as opposed to fresh buying in the euro.

The euro is going to face another tough week as the European Central Bank holds its meeting on Thursday. Even though traders are not expecting any change in the interest rate the pressure is piling on Mario Draghi to make a big gesture.

Last week, Edwald Nowotny of the ECB stated that full blown QE should not be ruled out; traders will be wondering if Mr Draghi shares the same sentiment as the language the ECB chief uses on Thursday will be under scrutiny.

The asset backed securities (ABS) purchase scheme by the ECB will begin this month, and since inflation in the eurozone ticked up to 0.4% in October, Mario Draghi may be tempted to play the wait-and-see game when it comes to QE which could trigger a short-term pull back in the euro.

The euro is still in a downward trend, and if the overnight low of $1.2438 is taken out the next level down is $1.24, which would put $1.23 in traders’ minds. To the upside, a confident move through $1.25 would put $1.2560 (50-hour MA) in sight and the level to watch would be $1.26.

Pound claws back losses

The overnight move in the pound was dominated by the relative weakness of the greenback, although sterling is slowly gaining upside momentum.

Last week the pound closed below the psychological $1.60 mark, a bearish signal ahead of the Bank of England meeting on Thursday that will be the focal point of the week.

Recently, we have had two significant hints from the UK central bank that it is in no rush to raise rates. As I stated last week, the Federal Reserve removed the safety net of the stimulus package, and this highlights the gap between the two economies which will keep pressure on the pound.

The BoE is expected to keep rates and the bond-buying scheme unchanged, but the statement afterwards will provide us with a crucial insight. If Mark Carney is singing from the same hymn sheet as Andrew Haldane and Sir Jon Cunliffe then the pound could be in for another round of selling.

Today, we are expecting UK manufacturing PMI at 9.30am; the consensus is for a drop from 51.6 in September to 51.5 in October, while in the US, the ISM manufacturing PMI report is expected at 3pm. Traders are anticipating a reading of 56.5 in October, versus September’s 56.6. 

The $1.60 level is acting as resistance, and weak manufacturing figures from the UK could put $1.5926 in sight. The next level down would be $1.59, and if that is breeched October’s low of $1.5885 would be on the radar.

A move above $1.60 would make the 200-hour MA of $1.6057 the immediate target and then $1.61. 

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