Euro catched eye after ECB meet; pound shows resilience, dollar struggle continues

Generally, there seem to be one or two influential drivers of the foreign exchange market, but now there are several cross-currents. With the busy and eventful week amid a couple of Data important releases from the Euro-Zone, BoE, and US FOMC meeting, let’s analyze what’s there in the treasure for the cross currencies in the coming days.

EURO
: After snapping the slide until last week, the EURO showed some advances as the last week’s ECB reversed the downward sloping move for the pair. It was widely assumed early last week that ECB President Christine Lagarde would talk down the Euro to prevent Euro-dollar moving above 1.20, sending Eurozone inflation deeper into negative territory. Instead, the ECB only discussed the recent Euro’s appreciation at the Governing Council meeting and said to have monitored the exchange rate carefully which boosted the EURO. The Euro also got a boost when Lagarde announced a “strong” economic rebound in the euro area suggested by the incoming data and recovery in the domestic demand. Further, it decided to keep interest rates and the coronavirus stimulus program unchanged at a total of 1.35 trillion euros, thereby giving Euro bulls the green light to push above 1.1900 levels. On the downside, 1.1650 remains a strong base for the pair which if taken out shall indicate a larger trend reversal and upside in the pair shall be capped near 1.2000 levels, thereby keeping the pair range-bound with upside biases. Hence for Euro-Rupee, it is advised to sell on upticks between 87.50-88.50 levels as the opportunity arises.

GBP: After having its dullest week since March as post-Brexit trade talks seem to be futile and the currency fell down by almost 3.7 percent before BOE, the currency regained slightly. However, the BoE gave the clearest signal yet again that it may consider cutting interest rates below zero for the first time in its history as the economy faces a surge in coronavirus infections and the risk of a no-deal Brexit. The comments prompted traders to bet that the next 10 basis points of easing might come in February, thereby keeping the pair vulnerable. On the growth front, the UK economy delivered its third straight month of expansion, but investors remain skeptical the recovery will continue until the no-deal Brexit risk is off the table. The news flow was not all negative as the UK reached an agreement with Japan to freeze its first major post-Brexit trade deal which held as good support for the pair. Hence for Pound-dollar, 1.2620 remains crucial support which if broken can drive the pair near 1.2435 levels. On the upside, the gains in the pair could be restricted around 1.3020 levels given by the Brexit uncertainties hovering around. Therefore, Pound-rupee could be sold on upticks between 95.20-96.50 levels as seen.

Dollar Index: The Dollar Index has been confined to a 92.00-94.00 trading range since July end and has been trading broadly sideways. The Fed meeting wasn’t a market mover as expected. However, the US Fed’s pledge to keep interest rates low for the next 3 years to help the US economy seemed to have surprised the markets. However, the dollar’s reactive fall to 92.90 levels came after the US jobless claims were seen persistently high which reinforced the Fed’s assessment of a difficult economic outlook. To the markets’ surprise and in sync with the of late realization about the economic growth trajectory, the high-flying US indices have also retraced nearly 10 percent from the record highs beginning from last week, thereby keeping gains in check for the dollar above 93.50 levels.

Then why is it that investors sold the stocks abruptly at once without warning?

Well, suspicion about a compromise on a coronavirus stimulus package ahead of the election and signs of a slowing recovery in the labor market have all contributed to the negative sentiment. The tit-for-tat responses between the US and China can turn critical for the coming weeks. Hence, the dollar is likely to remain vulnerable but in the confined range of 92.00-94.00 levels.

-Amit Pabari is managing director of CR Forex Advisors. The views expressed are personal.