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.
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