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The EUR/GBP overdoes it on International Bank Day

Jul 6 • Market Commentaries • 1252 Views • No Comments

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Yesterday should have been called International Central Bank Day, with the Peoples Bank of China, the European Central Bank and the Bank of England all making headlines.

The EUR/GBP traded quite volatile in the run-up the policy decisions of the BOE and the ECB. The pair hovered in a 0.8020/0.8040 rang going into announcement of the BOE. The Bank brought no surprise and raised the programme of asset purchases by £50 bln to £ 375. Sterling moved to the bottom of the mentioned trading range. This might be partly due to some outside expectations for more aggressive action of the BOE. However, it was not the BoE who took markets by surprise. Less than one hour after the BoE decision, the ECB policy decision flashed on the screens. The rate cut of the ECB refi rate was not surprise. However, the zero deposit rate was clearly not discounted in the market. With this decision, the ECB moved clearly in uncharted territory. This high profile decision hit the euro. EUR/USD tumbled and EUR/GBP to some extent joined this move; the pair dropped below the 0.8000 mark and EUR/GBP tested the 0.7972 support, the last area of defense head of the year low at 0.7950. However, this level was left intact, at least for now.

Today, the UK PPI data will be published. They are interesting, but with yesterday’s BOE step out of the way, we doubt that this report will have much impact on markets. To focus will continue to be on the fall-out from yesterday’s ECB decision. Sentiment on the single currency as clearly deteriorated. EUR/GBP is coming very close to the year low. A test of this level might be on the cards and we wouldn’t be surprised to see a break of this level.

 

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The EUR/GBP cross rate consolidates 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.  Continued trading above the 0.8100 area would call off the downside alert and improve the short-term picture. The pair tried several times to regain this area, but there were no follow-through gains. Of late, we looked to sell into strength for return action lower in the range. In case the 0.7950 year low would be broken, the next high profile support is seen in the 0.77 area.

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