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A Noteworthy EUR/USD Move That's Possible Today

A Noteworthy EUR/USD Move That's Possible Today

Boris Schlossberg, Technical Strategist

With the US still mired in political problems, today’s ECB meeting is the focal point in the FX market, and comments from ECB President Mario Draghi could help EURUSD overcome the stubborn 1.36 level.

The political dispute in DC continues unabated today, while in Italy, Prime Minister Enrico Letta appears to have acquired enough support from members of Silvio Berlusconi's People of Freedom (NPL) party to remain in power. The euro (EUR) was unmoved for most of the Asian and European sessions as traders await the European Central Bank (ECB) rate decision and press conference.

With EURUSD up markedly since the Federal Reserve elected not to taper asset purchases, it will be interesting to see if ECB President Mario Draghi tries to talk down the euro. Draghi has already mentioned the possible restart of the LTRO program, but what may really send EURUSD tumbling is his focus on interest rates.

With inflation well below target, the ECB has the scope to ease further, and if Draghi hints that the governing council may be open considering a rate cut, the euro could quickly tumble.

If, on the other hand, Draghi sticks to the script and downplays the impact of the rising currency, EURUSD could easily breach the 1.3600 level, which has been a solid resistance point for nearly three weeks.

See related: 3 Problems Forcing the ECB’s Hand

In the UK, the construction PMI index missed its mark, printing at 58.9 versus 60.1 expected. While this was still a very strong reading, it was the second PMI forecast miss this week, suggesting that the economic rebound in the UK may be starting to slow down a bit.

Tomorrow's UK PMI services reading will be especially important in determining the near-term direction of the British pound (GBP). Having set a spike high at 1.6260 yesterday, GBPUSD may be due for some correction over the next few days.

Risk Aversion Weighs on USD/JPY

Contrary to EURUSD, further losses in UDJPY continue to plague the pair, which slipped below the 97.50 level before finding some support. The decline in USDJPY is being driven by increased risk aversion, with the Nikkei dropping by more than 2%, and of course, by the growing fears that the US budget impasse may drag into the debt-ceiling negotiations and push the US into its first-ever debt default.

The situation in Washington shows no signs of being resolved, as both sides look to dig in for a possible showdown over the debt ceiling. As we noted yesterday, the longer this standoff drags on, the greater the pressure on USDJPY will become. If the conflict turns into a constitutional crisis, it could send the pair tumbling towards the 95.00 level as October unfolds.

The economic calendar is light today, but weak trade and housing data out of Australia overnight helped reverse some of yesterday's Australian dollar (AUD) gains, as it showed that economic activity down under remains weak.

In North America today, the ADP employment report may have to stand in for non-farm payrolls (NFP), which may not even be released this week if the government remains shut down. Markets are anticipating an ADP reading near 170K, and given the recent strength in jobless claims, it is likely that the ADP figure will print in line.

By Boris Schlossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.