EUR/USD Struggles on ’Brexit’ Uncertainty; Outlook Hinges on U.S. NFP

Talking Points:

- Post-BoE GBP/USD Relief Rally Eyes Former-Support Zones Amid Concerns of ‘Inflation Overshoot.’

- EUR/USD Struggles on ‘Brexit’ Uncertainty; Outlook Hinges on U.S. NFP Report Following 8 to 2 FOMC Split.

GBP/USD Daily

Chart - Created Using Trading View

• The near-term advance in GBP/USD looks poised to gather pace over the coming days as the Bank of England (BoE) talks down expectations for additional monetary support, with the exchange rate threatening the downward trend carried over from September; will keep a close eye on the former-support zones for new resistance as the broader outlook remains tilted to the downside.
• With Monetary Policy Committee (MPC) members Ian McCafferty and Kristen Forbes still opposing the increase in asset-purchases, it seems as though the BoE could be forced to gradually move away from its easing-cycle as the central bank warns ‘there are limits to the extent to which above-target inflation can be tolerated,’ and a further shift in the monetary policy outlook may undermine the bearish sentiment surrounding the British Pound as Governor Mark Carney and Co. becoming increasingly concerned about the ‘inflation overshoot.’
• Break/close above 1.2460 (61.8% expansion) to 1.2490 (38.2% retracement) to open up the next topside target around 1.2630 (38.2% expansion) to 1.2680 (50% retracement), with the key area of interest coming in around 1.2920 (100% expansion) to 1.2950 (23.6% expansion).

EUR/USD Daily

Chart - Created Using Trading View

• EUR/USD pares the advance from earlier this week following the court ruling on ‘Brexit’ as the decision further complicates the U.K.’s departure from the European Union (EU); with market attention turning to the U.S. Non-Farm Payrolls (NFP) report, another weaker-than-expected print may prop up the euro-dollar as it provides the Federal Reserve with greater scope to further delay the normalization cycle.
• Despite the 8 to 2 split within the Federal Open Market Committee (FOMC), Chair Janet Yellen and Co. appear to be on their way to deliver a December rate-hike as the central bank follows a similar course to 2015, but the fresh updates to the economic projections may undermine the bullish sentiment surrounding the U.S. dollar should Fed officials continue to curb their long-run interest rate forecast.
• The recent string of higher highs & lows may spur a test of trendline resistance, but the pair needs to break/close above the Fibonacci overlap around 1.1090 (50% retracement) to 1.1110 (50% retracement) to open up the next topside area of interest around 1.1220 (61.8% retracement) to 1.1250 (61.8% retracement).

• The DailyFX Speculative Sentiment Index (SSI) shows the retail crowd remains net-long GBP/USD even after the British Pound ‘flash crash, with sentiment hitting a 2016-extreme of +5.97 in October, while traders flipped net-short EUR/USD at the start of November.
• GBP/USD SSI sits at +1.60 as 61% of traders are long, with short positions 32.6% higher from the previous week even as open interest stands 5.4% below the monthly average.
• EUR/USD SSI sits at -1.46 as 41% of traders are long, with short positions 34.4% higher from the previous week, while open interest stands 4.5% above the monthly average.
• Will keep close eye on GBP/USD SSI as the near-term advance in the exchange rate is accompanied by a jump in short-interest.

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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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