BoE Super Thursday: 3 Trading Scenarios

Dear Traders,

Yesterday’s trading was not to our liking with the euro and pound moving sideways within limited price ranges. We now hope for better and more profitable market conditions today as we have a big risk event coming up. Sterling traders prepare for high volatility with the focus shifting to the Bank of England’s monetary policy announcement. Today is a ‘Super Thursday’ in the UK, when the rate announcement is accompanied by the publication of the meeting minutes and of the quarterly Inflation Report.

Apart from this major risk event, investors consider prospects for U.S. tax cuts and President Trump’s Fed pick. Trump plans to nominate Federal Reserve Governor Jerome Powell to the job as a new Fed Chair, according to four people familiar with the decision. Powell as the next Fed Chair would closely mirror the Fed’s stance under Janet Yellen since he also supports gradually rate increases. Trump will announce his decision today at 19:00 UTC. Given broad expectations that Powell would be the pick, the U.S. dollar slightly declined against other major currencies on the news. Generally speaking, Powell is relatively dovish-leaning on monetary policy and represents a bit of continuation of the current monetary policy course under Yellen.

The most interesting event, however, will be the BoE decision and traders in the GBP/USD should watch out for large market swings. The market is pricing in a 90 percent chance of a rate hike from the BoE which would be the first move since the central bank cut interest rates in the aftermath of the Brexit. However, there are warnings BoE Governor Carney is making the wrong move at the wrong time. Having prepared investors for the first rate increase in a decade, the BoE has little choice but to move, even though Brexit is clouding the outlook while a subsequent slowdown would prevent the central bank from hiking again. With the BoE being particularly concerned with Brexit, a rate hike could be a ‘one-and-done’ while such a move is unlikely to mark the beginning of a rate cycle at this point.

In more ways than one, it’s an unusual rate increase. While inflation is rising due to the weakening pound, economic growth is below average. The BoE therefore faces a tricky problem. It has to raise rates due to rising inflation that is significantly above target but it is also concerned about the negative economic and financial implications of the Brexit fallout.

Let us quickly focus on the possible trading scenarios.

Neutral scenario (most likely): The BoE hikes in order to retain its credibility but will not commit to a tightening cycle (One-and-done rate hike). The GBP/USD could initially rise on the outcome but is likely to fall back towards the lower barrier of its recent trading range (see chart below). We expect the pair to trade between 1.34 and 1.30.

Bullish scenario (unlikely): The BoE hikes and makes clear that it intends to follow a hawkish course with further rate hikes in the medium-term, similar to the Fed. The pound will skyrocket and could quickly break 1.3450 and further 1.36. The next target would be 1.40.

Bearish scenario (possibly but would be a shock): No rate hike. The BoE could alleviate the negative effect on the pound by confirming that a rate hike will come in December. No rate at all is not an option since inflation is running above target while BoE policymakers must also keep their credibility. In such case, the pound could fall towards 1.30 before it recovers losses on prospects of a later rate hike.

The BoE decision will be announced at 12:00 UTC, alongside new economic forecasts and Carney will hold a press conference 30 minutes later.

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Watch Out For End-Of-Quarter Volatility

Dear Traders,

It’s Friday and while today is not only the last trading of the week and month of September it is also the last trading day of the third quarter. From our experience we know that the final 24 hours of a quarter can lead to volatile swings in the markets as investors take profit and rebalance their portfolios. This can lead to large movements and price breakouts in the FX market. While this could also be the case today, traders should secure weekly and monthly profits when having already gained a good return. We can only point out that greed is a deadly sin in financial markets and that traders should be well aware of this.

The U.S. dollar gave up its recent gains Thursday despite better than-expected U.S. GDP data. The growth rate was revised to 3.1 percent, the strongest in more than two years but the market largely ignored the positive data. Traders rather reaped benefits from participating in the euro’s and pound’s reversal. As expected, the pound sterling found support at 1.3340 and headed for a test of 1.3450. New optimism appeared after the latest round of Brexit talks has made considerable progress on issues that matter, according to the U.K. Brexit Secretary David Davis. This “new dynamic” helped the pound to recover some losses. We now expect GBP/USD to trade between 1.35 and 1.3320.

The U.K. GDP report is scheduled for release at 8:30 but quarter-end flows could matter more than economic reports.

The euro gained some ground above 1.17 and climbed back towards 1.18. Whether this recovery will be sustained remains to be seen whereas we currently see a higher likelihood for further bullish momentum towards 1.19.  We will now focus on prices above 1.1810 in order to take advantage of potential bullish breakouts. In case the euro falls back below 1.1730, we see chances in favor of a dip towards 1.17 and 1.1680.

Traders should keep an eye the Eurozone Consumer Price report due at 9:00 UTC, which could have a positive impact on the euro.

We wish you a pleasant and well-deserved weekend.

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BoE Rate Decision: Chances In Favor Of Dovish Outcome

Dear Traders,

There has been a reversal in the market. After a long period of U.S. dollar weakness we finally saw the dollar strengthening against its peers. The greenback gained against the euro and British pound on fresh hopes that a tax plan from the Trump administration is coming soon. However, the dollar became recently incredibly oversold, which is why some correction was inevitable. The dollar’s relief rally pushed the euro below 1.19 and also the pound sterling traded off its highs Wednesday. Sterling traders await the Bank of England decision scheduled for 11:00 UTC and sold pounds ahead of that highly anticipated event. The U.K. Jobs report showed wages rose less than expected and these weaker figures prompted traders to also brace for a dovish outcome at today’s BoE decision.

While there is little chance that the BoE will announce any material changes to its current monetary policy today, the devil is in the details. Changes in monetary policy are the main drivers in the market and with U.K. inflation already rising toward 3 percent, it is questionable how long the UK authority can justify its 0.25 percent interest rate. If the U.K. monetary policy committee repeats its 7-2 vote for unchanged interest rates, the pound could fall. In the hawkish case of a 6-3 vote, the market would interpret it as a signal that the time for a rate hike is nearing. In that case the pound could rise.

GBP/USD

Whatever the case, we will prepare for both bullish and bearish scenarios, whereby the technical picture is pointing to a bearish scenario:

As long as the price remains below 1.3230 we see chances of a bearish break below 1.3150. A potential head-shoulders pattern predicts upcoming bearish momentum if the pound falls below 1.3160. That pattern becomes void when price breaks above 1.33 again. Lower targets are seen at 1.31 and 1.3030.

EUR/USD

We expect further bearish momentum towards the support zone at 1.1750-1.17. If the euro, however, remains well above 1.1820 we could see another run for 1.19 and 1.20.

Traders will also keep an eye on the U.S. Inflation figures, scheduled for release at 12:30 UTC. If Consumer Prices surprise to the upside, the dollar rally will gain momentum.

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Super Thursday: Hope For The Best, Prepare For The Worst

Dear Traders,

It’s ‘Super Thursday’ and market participants brace for wild swings given the chance of an extreme impact of an unexpected outcome. There are three critical events to watch today: the ECB rate decision; former FBI Director Comey’s testimony and last but not least the U.K. election. Since first results of the U.K. election are expected to come in Friday morning at around 1am local time, we will first focus on the European Central Bank statement and then pay attention to James Comey’s Senate testimony during the North American trading session. The testimony however, may not be so momentous since Comey will stop short of saying if he thinks Trump sought to obstruct a federal probe of Russia’s role in the 2016 election, according to a person familiar with his thinking. If the scandal deepens, however, the U.S. dollar could suffer further losses.

The ECB’s policy decision due at 11:45 UTC is followed by Mario Draghi‘s press conference 45 minutes later. ECB policy makers are not expected to change their monetary policy but the ECB will cut its inflation outlook because of weaker energy costs, while raising forecasts for economic growth. A downward revision would give Draghi additional time to be patient in the months ahead. The euro tumbled to a low of 1.1203 on these lower inflation expectations.

The EUR/USD was recently confined to a trading range of 1.1285 – 1.12. Looking for profitable trading opportunities, we recommend traders waiting for significant breakouts of that range. Above 1.13, we expect a next barrier to come in at 1.1370 while on the bottom side, losses might be limited to the 1.11-support level.

GBP/USD

The pound was supported by confidence in a victory by Prime Minister May’s Conservative Party. Should the U.K. snap election lead to a hung parliament, the pound could free-fall as this outcome is considered the worst scenario. A victory for the Conservatives however, would be supportive of the pound, while this outcome is already priced in. In other words, the risk is to the downside and even in the case of a strong win for May, the longer-term effects could weigh on the pound as it increases the odds of a harder Brexit.

A potential head-shoulders pattern in the daily chart supports the assumption of a weaker pound in the long-run. If the pound breaks significantly below 1.2770 the SHS-pattern would be in play, suggesting further losses towards 1.26 and 1.24. An upside break above 1.3050 would however void this pattern.

 

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We wish you good trades and many pips!

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Is The Euro Rally Fading?

Dear Traders,

While Tuesday proved to be a volatile trading day in the markets, there were no sustained profits for day traders. The euro rejected 1.1270 and plunged into negative territory and while our short entry level has proved profitable, we have missed out on the final downward move as we terminated trading too early. The British pound traded flat within a 80-pip trading range and larger market movements are still lacking.

Today’s attention will be on the FOMC meeting minutes from the Federal Reserve’s most recent meeting and traders will be looking for clues on the pace of interest rate hikes. The minutes are due at 18:00 UTC and traders should prepare for volatile swings even ahead of that release.

No less important could be a speech by ECB President Mario Draghi who speaks in Madrid at 12:45 UTC.

Is the euro rally fading? This is the crucial question, so we should take a look at the technical picture.

EUR/USD

After failing to break above 1.1270 the euro reversed and closed below 1.12. The daily close below 1.12 suggests that we might see a stronger pullback which could be in play as soon as the euro dips below 1.1160. The focus then shifts to lower targets at 1.1120 and 1.11. We bear in mind that euro bulls are likely to buy euros at lower levels so a potential correction could be limited until these levels. However, if the euro falls below 1.1070, a steeper slide is possible targeting 1.10. Bullish breakout traders should however pay attention to prices above 1.1270, providing a basis for a test of 1.1320.

 

GBP/USD

Not much has changed in the technical picture since the cable continued its sideways trend. As long as prices fluctuate between 1.3080 and 1.29 the recent upward trend channel is considered intact. Traders should pay attention to price breakouts above or below these levels.

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We wish you good trades and many pips!

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Will Markets Gain Momentum Today? Focus On Breakouts

Dear Traders,

After two days of low volatility and small market movements we might see an increase in volatility today with the March FOMC minutes being scheduled for release ahead of the upcoming meeting between U.S. President Donald Trump and his Chinese counterpart Xi Jinping. The meeting is of high significance and is expected to set the tone for future developments of China-U.S. relations. Consequently, the market will take its cue from that meeting.

We therefore prepare for larger market movements which may occur as early as today. As expected, the euro traded between 1.07 and 1.06 on Tuesday and traders should keep an eye on significant price breakouts either above or below that trading range. Above 1.0715 we see a higher likelihood for further bullish momentum, driving the euro towards 1.0820. On the bottom side, we will focus on a break below 1.0585 in order to sell euros towards 1.05.

The British pound consolidated between 1.2470 and 1.2420. From a technical perspective, we now see chances for a breakout in the near-term. Prices narrowed, formatting a symmetrical triangle in the hourly chart this morning and based on that chart pattern, bullish momentum may accelerate after a break above 1.2450, whereas bearish may increase after a renewed break below 1.2430. If the pound climbs above 1.2525, it may head for a test of 1.26. Below 1.2380 however, we favor a bearish bias, targeting at 1.23 and 1.2250.

There is plenty of important U.S. data scheduled for release today, so traders should prepare for some volatile swings around the time of the following reports:

8:30 UK Services PMI

12:15 USA ADP Employment Change

14:00 USA ISM Non-Manufacturing Composite

18:00 USA FOMC Meeting Minutes

(Time zone UTC)

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We wish you good trades and many pips!

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How High Can The Pound Go?

Dear Traders,

The British pound continues to rise but how high can the pound go? Sterling was recently supported by hopes for a slow Brexit, fueling investors’ risk appetite for sterling in short-term time frames. Nevertheless, we should consider that Brexit remains a threat to the pound, as well as the dollar rally which may have paused but need not be over yet. With that in mind we are looking for higher resistance zones, presenting an attractive opportunity to sell sterling at higher levels.

GBP/USD

The pound broke above its recent downward channel and bulls took advantage of that upside break. The focus now shifts to the crucial resistance zone at 1.2720-1.2775. That zone may prove as a strong resistance and sterling bears might jump back in if the pound hits 1.27 or slightly higher levels. On the downside, we expect the 1.2550 and 1.25-levels to lend a short-term support to the cable.

Sterling traders will watch the U.K. GDP report scheduled for release at 9:30 UTC and it would need a disappointment to drag down the pound from its lofty levels.

The euro traded boringly sideways and as long as that sideways trend continues there is nothing new to report. Above 1.0770 the euro may head for a test of 1.08 whereas a renewed break below 1.0720 could drive the euro towards 1.0680. There are no major economic reports scheduled for release and with the lack of market drivers we expect the price action to be constrained to a tight trading range.

From the U.S. we have Advance Goods Trade Balance due for release at 13:30 UTC followed by New Home Sales at 15:00 UTC.

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We wish you good trades and many pips!

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Surprise Effect At The ECB Meeting?

Dear Traders,

After rejecting the 1.07-mark the euro noticeably strengthened against the U.S. dollar and traders are now wondering whether Mr. Draghi could provide a further boost for the euro. As stated in Tuesday’s analysis we expect a next resistance to be at 1.0830/50 and still anticipate gains to be limited to this level. The European Central Bank is expected to extend its bond-buying program by six months but more importantly, investors are watching to see if the ECB signals a future guidance on when it will wind down or taper its QE program. If there is any hint of tapering the euro will soar and could overshoot the bullish target around 1.0830. Moreover, the ECB could disappoint the markets if the program is not extended that long or if the central bank cuts monthly purchases. This would be euro-positive.

The main focus therefore is on the Q&A session during the ECB press conference beginning at 13:30 UTC. For ECB President Mario Draghi it could be a communication challenge as the market reacts extremely sensitive to any unexpected changes. Thus, any comments on the future outlook might be misinterpreted at this stage. Traders should prepare for volatile fluctuations and exaggerated currency movements as the market does not have a lot of clarity on what to expect from the ECB.

EUR/USD

The euro found firm ground near 1.05 – Further gains to come?

Bullish scenario: Given the recent upward channel we expect potential gains to be limited to 1.0835 but the price action will depend on Draghi’s communication. If the euro climbs above 1.0860, we might see a run for 1.0910 and 1.0950. We see a strong resistance around 1.0950 and it would require an unexpectedly hawkish ECB statement, or a misinterpretation of it, to drive the euro beyond this level.

Bearish scenario: On the bottom side we expect the 1.0680-level to lend some support for the euro. Below 1.0660 however, we favor a bearish bias and shift our focus to lower targets at 1.0580 and 1.0470.

 

 

The ECB announces its rate decision at 12:45 UTC but no changes are expected. Then all eyes turn to the ECB Press Conference 45 minutes later.

We wish all traders good trades for today and many profits.

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We wish you good trades and many pips!

Any and all liability of the author is excluded.

Copyright © All Rights Reserved 2016 Maimar-FX.

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