What Will The ECB Do

Did Draghi Revive the EUR/GRP

Jul 27 • Market Commentaries • 1744 Views • No Comments

Yesterday, the intraday price range of EUR/GBP was remarkably small, given the sharp swings in other euro currency cross rates. In line with the price trend of late, sterling remained well bid yesterday morning and the pair reversed a big part of the post-Nowotny gains early in the session. The pair spiked also higher from the 0.7815 area to the 0.7860 area on the headlines from Mr. Draghi.

However, this rebound halted very soon. Later in the session, Cable joined the risk rally that was seen in other markets. EUR/USD hardly succeeded to outperform cable, even as the comments from Draghi were seen as a potential U-turn in the management of the EMU debt crisis. EUR/USD settled in a sideways consolidation pattern. The pair closed the session at 0.7830, even a few ticks’ lowers from Wednesdayís close a 0.7844.

Do not expect much action for the Great British Pound with the 2012 Olympics starting today in London, all eyes and ears will be on another type of gold.

Today, there are no important eco data on the calendar in the UK. So, EUR/GBP trading will be driven by global market sentiment and by technical considerations. Yesterday’s price action was a clear illustration of underlying sterling strength. However, as long as the commitment of ECBís Draghi is not watered down, we see this as short-term positive for the euro overall. This should also provide downside protection for the EUR/GBP cross rate. Of late we amended our ST bias in this cross rate from negative to neutral and we now look out whether a correction might be in store. Sustained trading beyond 0.7950 (previous range bottom) would improve the short term picture in this cross rate.
 

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From a technical point of view, the EUR/GBP cross rate was captured in a consolidation pattern following a longstanding sell-off that started in February and ended mid-May when the pair set a correction low at 0.7950. From there, a rebound/short squeeze kicked in. However, the move had no strong legs and finally, EUR/GBP dropped below the 0.7950 range bottom. This break opened the way to the next high profile support, in the 0.77 area (Oct 2010 lows). Last week, the decline slowed a bit, but the trend remained clearly intact. On Monday there was a first setback, but it didnít change the global picture. The 0.77 area is still an obvious LT target on the charts. However, this weekís rebound might mark a short term reversal signal.

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