Both the pound and the euro are likely to be in the spotlight today as central bank policy for both currencies takes centre stage for different reasons.
In the case of the pound it would ordinarily be as a result of the latest interest rate decision; however the markets aren’t expecting any surprises here and the status quo is the most likely outcome, despite the rather negative data seen of late.
Any decision on further QE, if it happens at all, will be left until after next week’s inflation numbers are out of the way, and the latest inflation report, also due next week.
The markets are going to be more interested in what Bank of England Governor elect Mark Carney has to say during his testimony this morning to the Treasury Select Committee of MP’s.
Given Mr Carney’s recent references to nominal GDP targeting, markets will be looking to see if he expands on that theme, and whether he thinks the current policy toolbox of the bank needs expanding. Any hint of a dovish response could well be negative for sterling.
It seems more likely that he will try and maintain as neutral a stance as possible with respect to showing his hand on policy, given that he hasn’t as yet taken up the reins at the bank and will want to avoid ruffling too many feathers before he even takes up his seat.
He may be pressed on whether he thinks the Bank can do more than it is currently doing with respect to helping the flat lining UK economy, and depending on his response here with regard to inflation risks, we could well see further pressure on the pound, or a sharp rebound.
This morning’s industrial production and manufacturing data for December is expected to show a rebound of 0.8% in both measures, while the trade balance is expected to narrow to -£8.9bn. A significant rebound here could also raise expectations of an upward revision in the Q4 GDP numbers.
The recent rally in the single currency has prompted a lot of hand wringing from politicians across Europe, with the notable exception of the Germans who appear quite relaxed about it, about how the recent strength in the currency could be hindering the recovery in the broader European economy.
This has raised hopes in some parts that the ECB might sound a warning that excessive currency strength is unwelcome.
Given that only last month President Draghi suggested that the ECB is comfortable with the value of the euro, that tail risks had been removed and financial markets have stabilised, it is most unlikely that he will say anything different today.
Draghi has always made it plain that it is up to governments to fulfil their obligations with respect to competitiveness reforms.
In any case central bank intervention has never been a particular forte of the ECB and they are unlikely to start now, especially in light of Draghi’s comments last month that countries should refrain from competitive devaluations of their currencies.
Given that the single currency remains quite some way away from the highs we saw in 2011 at 1.4940, the most likely outcome is likely to be one of the status quo.
EURUSD – Monday’s bearish engulfing pattern continues to point to early indication of a pullback, after yesterday’s failure at the 1.3600 level. Only beyond 1.3700 negates and argues for 1.3850.
First stop is likely to be the 1.3400 level, while below that we have the 1.3250 level the January lows. The long term support line from the 1.2045 lows now comes in at 1.3130 which remains the key level on the downside.
GBPUSD – the pound continues to hold above trend line support at 1.5635 from the 1.3500 lows in 2009, however the lack of any sort of conviction in any rebound suggests a break could well see a retest of the 2 year range lows at 1.5270 on a break below 1.5600.
The pound needs to close back beyond the 200 day MA at 1.5910 to stabilise and diminish the downside risk.
EURGBP – the chop in this cross continues however the risk remains for a pullback while to the recent highs at 0.8715 remain intact. Only a move through here targets 0.8780.
The 200 week MA and 0.8525 level should continue to act as support on any pullbacks, with only a push below re-targeting the 0.8425 area. Long term trend line support at 0.8125 comes in from the 0.7755 lows.
USDJPY – have we found a top at 94.00 the 38.2% of the down move from the 2007 highs at 124.15 to 75.30. We also have resistance at 95.00 which is the 2010 highs.
Only below the 90.30 level argues for a deeper correction towards key support at 87.50