Talking Points:
- EUR/USD Holds Narrow Range, Outlook Hinges on ECB’s QE Exit.
- GBP/USD Remains Capped by 1.3200 Hurdle Ahead of U.K. 3Q GDP Report.
- Sign Up & Join DailyFX Currency Analyst David Song for a Preview of the ECB Meeting.
EUR/USD pares the decline from earlier this week, with the exchange rate at risk of facing range-bound conditions ahead of the European Central Bank (ECB) meeting on October 26 as President Mario Draghi and Co. appear to be on course to wind down the asset-purchase program.
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The Governing Council is widely expected to move away from its easing-cycle as ‘the continued strong momentum of the euro area economy supported confidence that inflation would gradually reach levels in line with the ECB’s medium-term objective.’ In turn, the central bank may layout a more detailed exit strategy especially as the central bank’s most recent lending survey notes that ‘in terms of the impact of the ECB’s expanded asset purchase programme (APP), euro area BLS banks continued to report a positive impact on their liquidity position and market financing conditions over the past six months.’
In turn, the Euro may face a bullish reaction as the ECB alters the outlook for monetary policy, but market participants may pay increased attention to the future composition of the central bank’s balance sheet as a growing number of Governing Council officials show a greater willingness to extend the quantitative easing (QE) program beyond the December deadline. As a result, a protracted QE program may ultimately drag on EUR/USD with the Federal Reserve largely anticipated to deliver another rate-hike in December.
EUR/USD Daily Chart
- EUR/USD remains at risk of facing a more meaningful correction as both price & the Relative Strength Index extend the bearish formations from August, with the near-term outlook capped by the former-support zone around 1.1860 (161.8% expansion).
- May see EUR/USD give back the rebound from the monthly-low (1.1669) as it struggles to hold above the 1.1770 (100% expansion) region, with a break/close below the 1.1670 (50% retracement) hurdle opening up the next downside region of interest around 1.1580 (100% expansion).
GBP/USD struggles to hold its ground ahead of the advance U.K. Gross Domestic Product (GDP) report, with the pair facing a greater risk of giving back the advance from the October-low (1.3027) amid the string of failed attempts to close above the 1.3210 (50% retracement) hurdle.
Even though the Bank of England (BoE) warns ‘some withdrawal of monetary stimulus is likely to be appropriate over the coming months in order to return inflation sustainably to target,’ a lackluster GDP report may generate another 7 to 2 split meeting as the U.K. economy anticipated to grow another 1.5% in the third quarter of 2017. In turn, the pound-dollar exchange rate may exhibit a more bearish behaviorahead of the next BoE meeting on November 2 as both price and the Relative Strength Index (RSI) retain the downward trends carried over from September.
However, a batch of better-than-expected data prints may spark a bullish reaction in the British Pound as it puts increased pressure on Governor Mark Carney and Co. to normalize monetary policy, and the central bank may adopt a more hawkish tone ahead of 2018 as ‘members continue to judge that, if the economy follows a path broadly consistent with the August Inflation Report central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than current market expectations.’
GBP/USD Daily Chart
Chart - Created Using Trading View
- GBP/USD sits at a key juncture as it comes up against channel resistance, with the lack of momentum to close above the 1.3210 (50% retracement) hurdle raising the risk for further losses especially as the Relative Strength Index (RSI) highlights a similar dynamic.
- With that said, a break/close below the Fibonacci overlap around 1.3090 (38.2% retracement) to 1.3120 (78.6% retracement) opens up the monthly-low (1.3027), with the next downside region of interest coming in around 1.2950 (23.6% expansion) to 1.2960 (78.6% retracement), the former-resistance zone.
- Need a break/close above the topside hurdle around 1.3300 (100% expansion) to 1.3320 (38.2% retracement) to adopt a more constructive outlook for GBP/USD.
Retail Sentiment
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- Retail trader data shows 41.2% of traders are net-long EUR/USD with the ratio of traders short to long at 1.42 to 1. The number of traders net-long is 4.7% higher than yesterday and 0.4% lower from last week, while the number of traders net-short is 2.8% lower than yesterday and 7.8% lower from last week.
- Retail trader data shows 53.3% of traders are net-long GBP/USD with the ratio of traders long to short at 1.14 to 1. The number of traders net-long is 11.1% higher than yesterday and 6.8% higher from last week, while the number of traders net-short is 0.2% higher than yesterday and 4.3% lower from last week.
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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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