Euro hammered by ECB front loading

EUR/USD has been hampered by the European Central Bank’s decision to speed up the QE scheme, while the negative CPI report from the UK weighs on GBP/USD. 

Source: Bloomberg

ECB’s plans hit euro

The euro has been hit hard by the ECB’s plans to front load its buying scheme in May and June, and this accelerated the decline in EUR/USD. The decision was taken to ramp up the bond buying in the near-term as the markets lock volumes in July and August, and an added benefit would be a jolt to eurozone growth, which is yet to fully seeing the impact of the QE programme.

To make matters worse for EUR/USD, German ZEW came in at 41.9 -  well below the expectation of 49 - and it is a massive drop from April’s reading of 53.3. The surprisingly large fall in German economic sentiment highlights how fragile institutional investors feel about the German economy, even though QE was revealed at the beginning of the year.

The $1.12 level was previously acting as support and now it is a point of resistance. If the level holds the support in the $1.1130 region will be the initial downside target, and then $1.11 will be in sight. On an hourly basis EUR/USD is oversold and we might see a move back above $1.12, and if that level is cleared $1.1280 will be the next target. 

UK slips into deflation

GBP/USD took a tumble after the UK entered deflation with a reading of -0.1% in April’s inflation report. The eurozone is the UK’s largest trading partner and the region is already experiencing negative inflation and that problem has now crossed the English Channel. We have already had downgrades to UK growth from the Bank of England ,and now that the UK in in deflation the likelihood of interest rates remaining unchanged for the foreseeable future have gone up, and this will keep pressure on GBP/USD.

The economic indicators out of the US haven’t been particularly impressive recently. The dollar was recently at a four-month low against a basket of currencies, and the Federal Reserve’s minutes tomorrow will give up a better idea about when rates will rise. More and more traders are looking to September for a rate hike, but if the Fed remains divided we could see further downward pressure on GBP/USD.

The $1.55 mark is the target, and if that is punctured then $1.54 will be the next level of support. If GBP/USD can hold above $1.55 a move towards $1.56 is possible.

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