The British economy has been one of the better performing of all global economies, even providing a significant part of the Forex market with the expectation that it will be the first of the major jurisdictions to begin to raise interest rates. And the core interest rate, or more correctly the interest rate differential in a pair, is the most important factor in expectations of exchange rate strength or weakness.
But of late, the pound Sterling has been in decline. There are a number of reasons for this, one being the fear that problems that exist in one of the UK’s biggest trading partners, the other countries of the EU which use the Euro, or the bloc that is known as the Eurozone, will be imported into the UK. The most significant of these at present is the spectre of too-low or negative inflation.
Now the Euro / pound exchange rate (EURGBP, chart above) has reached and been rejected, for now at least, by the 200 Day Exponential Moving Average (EMA). As can be seen, the market respected this configuration last month, with conviction. Will it do so again on this occasion?
Draghi is on stage later today, while the Euro proves its resilience
As has happened so often in the past, just when commentators are at their loudest in painting the Euro as a basket case, heading, they will have it, to parity with the US dollar, it turns around and proves them wrong. Last week it broke down though the psychologically important 1.25 level, only to come back and strengthen to above that level once more on Friday.
Later today Mario Draghi, president of the European Central Bank (ECB) will appear for his quarterly hearing before the Committee on Economic and Monetary Affairs (ECON) of the European Parliament in Brussels.
In the meantime the US Commodity Futures Trading Commission (CFTC) Commitment of Traders (CoT) figures show that speculative traders have been net-short Euro futures to a significant extent for the last number of weeks. The CoT figures are often used as a contrarian indicator, i.e., extreme short positions are held to point to the prospect of the currency in question, in this case the Euro, rising in the near future. One way that this could happen is if there is a rise in the Single Currency in the short term, the resulting triggering of stop loss orders could create what is known as a “short squeeze” where all these stops, which are in reality BUY orders, will create sufficient demand for market forces to send the currency sharply in the upward direction.
Comments from the president of the ECB could be one catalyst for this to happen.