GBP/USD Bounces to 50-day SMA

GBP/USD Bounces to 50-day SMA

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GBP/USD Bounces to 50-day SMA

Sterling traded extremely well on the back of the Federal Reserve’s monetary policy announcement but like U.K. Chancellor Osborne, the Bank of England could warn of the economic instability that would transpire if Britain leaves the European Union. Osborne rolled out sweeping changes in taxes as a way to boost growth. This includes a cut in corporate taxes and a new sugar tax on soft drinks. They also lowered the GDP forecast from 2.4% to 2%. This morning’s U.K. employment numbers were better than expected with the claimant count rate falling and average weekly earnings rising. Since February we’ve seen both improvements and deterioration in the U.K. data so the Bank of England is likely to keep their overall view on the economy unchanged.

Technically today’s rally in GBP/USD has taken the pair back towards the 50-day SMA which is the main level of resistance. If GBP/USD breaks above 1.4320, the next stop will be 1.4400. However if it fails at the SMA, a move back to 1.4050 is likely.

EUR/USD – Failing Right at 50-day SMA

EUR/USD – Failing Right at 50-day SMA

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EUR/USD – Failing Right at 50-day SMA

Yes we are talking EUR/USD 3 days in a row but that’s the trade we are in and it’s the most important pair right now. This week the ECB cut interest rates, extended its QE program and the EUR/USD rallied. Yellen warned that delaying a rate hike is a risk and NFPs were strong but the USD barely rallied. While it may be difficult to remain confident in our views that EUR/USD will drop back below 1.08, the fundamentals remain intact. Also, ECB officials were not happy with the market’s reaction. ECB member Constacio was the first to say that the markets got the ECB’s message wrong. A rising euro diminishes the effectiveness of ECB stimulus.

Technically, the short squeeze in the EUR/USD stopped right at the 50-day SMA as shown in the attached chart. There’s also a significant resistance above current levels between 1.10 and 1.1060. The 100-day and 200-day SMA should cap gains for the pair. In terms of support the main level to watch the July swing low of 1.0809. Once that’s broken it should be clear sailing to 1.07.

AUD/USD Breaks 100-day SMA

AUD/USD Breaks 100-day SMA

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Fundamentals

For the first time since March, AUD/USD closed below its 100-day SMA, which suggests that the currency is prime for further losses. Of course whether that happens or not hinges on fundamentals. Weaker Australian data and a steep slide in global equities sent the currency pair tumbling on Friday and tonight, AUD remains in play with Australian and Chinese manufacturing PMI reports scheduled for release along with Australian Producer Prices. We know that price pressures down under are falling but the Chinese economy is stabilizing and that may lend support to Australia’s manufacturing sector. If Australian manufacturing activity accelerated in the month of July, it could halt the slide in AUD/USD but if it slows, the currency pair could drop to a fresh 7 week low. Friday’s U.S. non-farm payrolls report is also important because a large part of the AUD/USD’s gains can be attributed to the market’s demand for U.S. dollars. If payrolls growth beats expectations and the unemployment rate holds steady, it will accelerate losses for AUD/USD but if payrolls rise by less than 200k or the unemployment rate increases, it would be significant enough to drive the currency pair back above the 100-day SMA.

Technicals

While fundamentals may be less clear, on a technical basis, the break of the 100-day SMA signals the beginning of a more significant downtrend for AUD/USD. Having consolidated above 0.9320 for the past 7 weeks, today’s move also takes the currency pair below a significant support level. At this stage, technicals point to a continued sell-off that should drive AUD/USD to at least 92 cents and possibly even 91 cents. If the currency pair finds a reason to rally, a break back above the SMA at 0.9320 would be needed to negate the downside momentum.