Forex snapshot

The outlook between the pound and the euro could not be starker, as one moves higher thanks to good data while the latter seems set for new lows in short order.

euro/dollar
Source: Bloomberg

All eyes on $1.35 in EUR/USD

The $1.35 level hove back into view yesterday, pushed down by dollar strength following Janet Yellen’s comments. German data of late has been disappointing, and the deflation fighting noises from the European Central Bank have given weight to the view that the central bank is sailing towards quantitative easing, in a bid to jump-start the eurozone economy.

There are still fundamental factors supporting the euro, such as the continuing decline in US treasury yields. It stubbornly refuses to move higher despite the gradual withdrawal of monetary stimulus, and a gradual diversification of currency reserves by countries around the world. A number of nations have shifted some reserves away from the US dollar, and the euro is one of their destinations.

All eyes are on $1.35 in EUR/USD, with a break below here opening the way to the $1.34 level, last seen in mid-November 2013. However, given the fundamental factors, such a move should be approached with caution.

Negative factors, such as a declining daily relative strength index and a fresh turn lower for the moving average convergence/divergence after a June bounce, suggest that more losses are in order for EUR/USD. Resistance on the upside would come into play around the 50-daily moving average and then $1.37.

GBP/USD no longer overbought

The $1.7165 area is now the big hurdle that the pound needs to clear against the dollar if the rally is to be sustained. Dollar strength yesterday did reduce some of the impact from a decline in UK unemployment, but even here the weak wage growth provided succor to those arguing that the Bank of England is still not ready to push the button on interest rate increases (if, indeed, it can find said button – having been so long since it was last used).

Nonetheless, the prevailing view is that the BoE will be first in the race to raise interest rates and this puts the emphasis back on further upside in due course, once $1.7160 is breached. A drop back to $1.7060 could find buyers, while beyond that $1.70 provides psychological support too.

GBP/USD is no longer overbought on a daily chart, giving it room to breathe in any rally, but a turn lower in the MACD and the stochastic momentum index will worry the bulls.

However the 20-DMA provided decent support earlier this week, while on the hourly chart the cross of the 50-hour moving average above the 200-hour will be welcomed by those keeping an eye on such indicators.

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