With the upside potential to both the EURUSD and GBPUSD being limited in the current economic conditions, both pairs are surrendering gains only encouraged by USD weakness at the conclusion of last week. The USD is also strengthening against its counterparts on Monday morning, which could support the view that the USD weakness at the end of the week was not due to a poor market reaction to the latest US employment report, but to the pressure on global stocks following the latest decline in oil finally catching up with the major currency.
The EURUSD has closed the doors at 1.18 and re-entered 1.17 after dropping as low 1.1787. There have been no economic announcements from Europe this morning, but the small decline seen could be linked to traders having next Thursday’s European Central Bank (ECB) policy meeting on their mind, where the major downside risk would be the ECB introducing QE. Even if the ECB refused to introduce QE, the EU economic sentiment is so bleak and at times worsening on a near-daily basis meaning it would require something completely unexpected to happen with the US economy to reverse the EURUSD’s fortunes.
The USDCHF bulls have benefited from the Euro softness, with the pair climbing to 1.0187 earlier in trading. Whenever the EURUSD declines, the USDCHF bulls have an extra spring in their steps as the Swiss National Bank (SNB) continues to remain on the front-line to defend the 1.20 EURCHF floor. With the pressure on the ECB to introduce further stimulus intensifying and the EURUSD trading in a bearish direction even without the extra stimulus, the SNB are going to remain on front-line defence of the 1.20 EURCHF floor. This points towards the USDCHF continuing to trade in a bullish direction in the longer term. The SNB introducing negative rates was not enough to prevent the EURCHF from remaining near the 1.20 floor, meaning there is a likelihood of expectations for further monetary easing from the SNB in the future.
The GBPUSD is also surrendering any gains, but this is hardly surprising considering tomorrow’s inflation data represents such a major event risk to the UK currency. The primary downside risk the GBPUSD faces is that inflation levels will be announced as having dropped below an annualised 1%, which would inevitably strengthen the Bank of England’s (BoE) already dovish views on price pressures and push any expectations for a UK rate rise even further back. Ultimately, this would further reduce investor attraction towards a currency that has already been weakened by factors such as a domestic election in the coming months and increasing signs of domestic momentum slowing down.
Any optimism that the oil markets were even going to enter a consolidation has already been swept away. To be honest, any optimism at all was highly premature and you just needed to check the difference between the daily high and daily open last Wednesday and Thursday to see that not only were any gains were marginal, but had only occurred after selling pressure earlier in that trading day. Brent has slipped back below $50 at $49.61, while Crude appears at major risk to making a new low below $46.81. The pressure on the oil markets is weighing on the Norwegian Krone and Russian Rouble, with the former weakening to 7.4121 against the USD and the USDRUB approaching 63.
Although heavy resistance for Gold could be found at $1238, the metal refused to surpass $1230 and has already dipped down to $1217. Aside from Friday’s annualised inflation data for December, the upcoming week is quiet in regards to US economic releases and although a reduced amount of US economic news could present an opportunity for Gold to move to the upside, the $1230 and $1238 resistance levels appear to be preventing any substantial gains. All present indications are continually pointing towards the US economic outlook improving and unless the Federal Reserve undertakes a U-turn on their commitment to raising US interest rates, Gold bulls are going to find it difficult to make substantial moves up the charts.
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
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