Forex: Goodbye Pound, Is The Euro On A Recovery Path?

Includes: FXB, FXE, UDN, UUP
by: FXstreet

The two main stories of the day are euro bullishness and pound weakness, with the sterling being pressured by the UK rating downgrade rumors and falling towards 7-month lows around 1.5415 against the dollar, and the EUR/USD proving to be alive after recovering from 1.33 lows to test the 1.3400 frontier again.

A risk appetite came to the market on Tuesday following a long weekend in the United States. Wall Street closed at multi-year highs on German ZEW news and more M&A deals. In the commodities space, both the WTI and the ounce troy of gold traded on the back foot, losing around 1.39% at $96.07 and 1.94% at $1603, respectively.

On currencies, the euro enjoyed a 170 pips positive movement from 1.3225 in the European session to test a fresh intra-week high at 1.3395 against the greenback at the beginning of the American session. Afterwards, the EUR/USD traded in consolidation mode between 1.3380 and 1.3395, just knocking on the 1.3400 door.

The EUR/USD stalled at 1.3393, where the resistance faced on February 15 is reinforced by the 200-hour SMA. As for the short term, if the cross manages to break above 1.3400, next resistances are seen at 1.3415 (hourly high/lows February 14). Meanwhile, supports are seen at 1.3330 (intraday low), 1.3306 (low February15) and 1.3285 (January 24 low).

"Although today's trading is somewhat listless, European events could provide some direction later this week, including eurozone PMI and German IFO confidence data, and Italian elections at the weekend," said Nick Bennenbroek, Head of Currency Strategy at Wells Fargo Bank.

Bennenbroek points out that the central bank´s outlook is leaning dovish once again, and the pace of improvement in the peripheral eurozone bond markets has slowed. He feels that a soft eurozone economy should see the euro weaken over time, while FX positioning offers plenty of scope for the euro to decline.

On the pound, the British currency weakened to fresh multi-month lows amid speculations and rumors that S&P could downgrade the UK's "AAA' rating. The GBP/USD collapsed to 1.5415, the lowest level since July 13, 2012. In the American morning, the cable was trading in a small range between 1.5415 and 1.5430.

According to short-term charts, there is still scope for further losses, as indicators point south below their midlines and the price remains capped by the 1.5500 mark. The bigger picture is also bearish, and a break below the 1.5415/00 area would expose the 1.5320 area ahead of 1.5267 (May 2012 low).

"Maintaining the bearish momentum, the GBP/USD broke below former support around 1.5440, accelerating towards 1.5400," says analyst Valeria Bednarik. "While further losses should remain limited today, a daily close below 1.5400 would confirm further slides, with the 1.5260 area now in sight."

About the pound, Bennenbroek comments that the economy returned to contraction in Q4, and confidence surveys remain consistent with only slow positive growth. The Wells Fargo analyst writes, "Elevated inflation is keeping the Bank of England on hold, but the Bank of England has indicated it is willing to ease further if needed, while balanced FX positions offer plenty of room for sterling to decline."

The Wednesday Ahead

Ahead of Wednesday's docket in the euro area, inflation figures in Germany are due ahead of the French Business Climate and CPI. Italian industrial orders/sales would follow, and a German 10-year bond auction will close the day before the later European Consumer Confidence release. The claimant count and ILO unemployment rate are the stars in the UK field.

In America, housing data and PPI will capture attention just before the FOMC minutes.

- Bank of England Minutes (Feb 20 9:30 GMT)

- Claimant Count Change (Feb 20 09:30 GMT)

- U.S. Building Permits (Feb 20 13:30 GMT)

- European Consumer Confidence (Feb 20 15:00 GMT)

- FOMC Minutes (Feb 20 19:00 GMT)

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