Forex snapshot

Over the last week GBP/USD has dropped over 250 points, and EUR/USD over 200.

GBP/USD tests 50-DMA

Last week saw GBP/USD flirt with hitting a new five-year high; this did not happen in the end, however. In the run up to yesterday’s UK inflation report, markets had begun to factor in chances of the Bank of England timeline for raising interest rates being brought forward. Somewhat surprisingly though, in the end this was not the tone that Mark Carney set. Instead he stated that when rates did rise they would do so at a slow pace and then be maintained at an historical low for some time.

Forward guidance has been the key backbone of the BoE’s policy since the Canadian took over, and he has now created a track record of sticking to his guns. In view of this, it looks unlikely that the central bank will suddenly surprise the markets without first giving it due warning.

Now that the pairing’s rate has dropped by 250 pips and is currently resting just above the 50-day moving average, drifting towards the longer-term trend line and edging towards oversold on the RSI, we might see levels tempting enough for the buyers to come back to the market.

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EUR/USD collapse continues

Over the last week EUR/USD has seen the relative strength index move into oversold territory.              

Having inferred to the market that the European Central Bank was monitoring the strength of the euro, and that if required they would look to do something in June, it appears that traders have partially done Mario Draghi’s job for him. This week has seen a succession of economic data being released that has helped build a compelling argument for some sort of intervention. Arguably one of the clearest signals was the German ZEW economic sentiment figures that came in 25% weaker than had been expected. The following day saw the Deutsche Bundesbank imply they would welcome some monetary easing.

EUR/USD has now broken through the 50-, 100- and 200-day moving averages and has now moved into oversold territory on the RSI. We are only halfway through May and at least two weeks away from Mr Draghi actually doing anything in June. Although the medium-term outlook for the pairing should be for an assisted descent, the short-term could see some sort of bounce first.

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