Forex snapshot

Those with an eye on the euro will note the slow deterioration in this particular market, but the pound hasn’t yet found a reason to stop rallying.

Euro and pound currency
Source: Bloomberg

EUR/USD gravitating back towards $1.35

Light volumes allowed EUR/USD to levitate against the US dollar but while the $1.35 level is providing major support, the bias here still remains to the downside.

Eurozone data continues to get worse, with recent figures from Italy showing inflation has all but disappeared. Again, Mario Draghi might not see deflation, but we’re not seeing inflation either. The general view remains that the European Central Bank will need to do more to get the economy going, or at least to continue combating low inflation.

On a weekly chart the 20-week moving average has crossed below its 50-week cousin, a very bearish signal, having not been in this position since November 2012.

Meanwhile, the $1.35 level on the daily chart stands out as the main element holding the market up. A close below here puts $1.34 into view and then $1.33, both of which saw buyers towards the end of last year. Any upside continues to be capped by the 50-daily moving average around $1.3615.

GBP/USD edges lower

The latest dip in GBP/USD isn’t much of a dip by itself, but more of a drift lower, ahead of potentially interesting Bank of England minutes this week.

The BoE still looks to be the first central bank to increase rates, and this is still the key element underpinning the move higher. Geopolitical concerns play only a limited part here. Instead, it is all about forward expectations on interest rates.

The rally in GBP/USD is now over a year old, but even if we do see a dip in the direction of the 50-DMA around $1.6949, the currency is no longer overbought, as it was at the beginning of the month.

A surprise on the BoE minutes, perhaps with several members voting for higher rates, would certainly energise GBP/USD. However, even without this, a test of $1.72 is still the most likely eventuality within the next few weeks.

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