Will ECB Drive EUR to 1.25?

Will ECB Drive EUR to 1.25?

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Will ECB Drive EUR to 1.25?

After rising for 4 straight days, EUR/USD pared its gains ahead of Thursday’s European Central Bank monetary policy announcement. The ECB is widely expected to leave monetary policy unchanged but among all of this week’s rate decisions, theirs should be the most market moving. Policymakers have been very clear that sometime this year, their guidance will change and the only question is how quickly they will start talking about unwinding Quantitative Easing and raising interest rates. Although data has taken a turn for the worse since the last meeting, it is important to realize that many of these indicators are slowing from multi-month or year highs, which means they are retreating from very strong levels. The Eurozone economy is still performing well, stocks are off their highs, Italy’s election may have led to a political stalemate but in Germany, Angela Merkel has won the right to form a coalition government with the Social Democrats, ending months of political uncertainty. The euro is strong but it hasn’t appreciated further than its end of January levels. When the ECB last met, President Draghi acknowledged the euro’s rise by warning that euro volatility creates uncertainty but then spent the majority of his press conference talking about the solid and broad based momentum in the economy and the prospect of higher growth surprises that could lift core inflation over the medium term. We don’t expect these views to change at this week’s meeting and given the market’s desire to sell U.S. dollars, ECB optimism could be drive EUR/USD back to 1.25. Yet if Draghi suddenly sounds more cautious, we could see a nasty reversal in EUR/USD as speculators are clearly leaning towards optimism

Will RBA Drive AUDJPY to 85?

Will RBA Drive AUDJPY to 85?

Chart Of The Day

Will RBA Drive AUDJPY to 85?

While we still like selling USD/JPY, we see a better opportunity in the Australian dollar. Last night’s weaker than expected Chinese industrial production and retail sales numbers reminded investors about the trouble in the region. Tonight, the minutes from the last RBA meeting are scheduled for release and we believe they will echo the cautious view presented by RBA Governor Lowe after the last meeting. To the market’s surprise, the central bank cut their growth forecasts citing the negative impact on the stronger currency. RBA Governor Lowe warned that a continued rise in the AUD would depress prices and limit employment. We believe this same sentiment will ring throughout the minutes reminding investors of the recent strains on the economy and weighing on the Australian dollar. We like selling AUD versus the Yen because not only was Japanese GDP very strong but we still believe USD/JPY should be trading lower.

Technically, the reversal on Friday failed to have significant continuation and the rejection of the 50-day SMA suggests that we could have another move below 86.00

ECB Could Drive EURO to 1.12

ECB Could Drive EURO to 1.12

Chart Of The Day

ECB Could Drive EURO to 1.12

The ECB meeting is one of the most important event risks next week. Over the past month, EUR/USD traders completely ignored the deterioration in the German economy because of positioning. The market was short euros on the belief that the Fed would tighten but the negative news flow from the U.S. scared them out of their positions. However investors and policymakers will not be able to ignore European data for much longer if the weakness continues. The ECB is not expected to increase stimulus next week because recent comments from European policymakers show no urgency to add QE but many major banks believe they will have no choice but to increase stimulus in the coming months. We have already seen some policymakers bend – earlier this week ECB member Nowotny said that with inflation targets clearly being missed, “its quite obvious that additional sets of instruments are necessary.” Even if the ECB ends up noncommittal, Friday’s PMI reports are likely to show further deterioration in the EZ economy.

Technically, EUR/USD raced to a high of 1.1493 on Thursday, just a few pips shy of 1.15 before reversing sharply. Resistance is obviously back at this key level of 1.15. Support is at 1.1190, the 61.8% Fibonacci retracement of the 2000 to 2007 rally.

Will Oil Drive USD/CAD to 1.30?

Will Oil Drive USD/CAD to 1.30?

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Will Oil Drive USD/CAD to 1.30?

One of the biggest stories today was the sharp decline in oil prices. WTI Crude dropped 2.25% to $43.83, its lowest level since March 2009. Canada is a major oil producer and extremely sensitive to the price of crude. The last time we heard from the central bank, they signaled that rates would not be lowered again this year but if crude prices fall below $40 a barrel, they may have to reconsider their position. We will learn more about Canada’s inflation situation later this week but lower prices will drive down inflation expectations across the globe so even if CPI increases in February like economists expect, it could fall again in the coming months. This possibility could weigh heavily on the loonie, especially if oil continues to fall and that dynamic could drive USD/CAD to 1.30.

Taking a look at the monthly chart of USD/CAD there is resistance at Friday’s high of 1.2824 but above that, there is no major resistance until 1.30. Near term support is at 1.26 with more significant support at 1.2350.

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