Sterling gains ahead of super Thursday

Global Markets

The Sterling pounced to fresh three-week highs at 1.4648 against the Dollar during trading on Wednesday following the unexpected acceleration inUK services PMI for January which boosted optimism towards the UK interest rate outlook for 2016. Pound bulls salvaged the opportunity to achievefurther dominance against the USD after a tepid US ISM Non-Manufacturing report trimmed the likelihood that US rate may be increased in March. Although the impressive UK services report did warrant an appreciation in the Sterling, this move felt somewhat exaggerated as the current unsettled economic landscape and risk-off trading environment should have left prices heavily pressured. Investors may have used Wednesday’s barrage of data releases as an opportunity to relinquish Sterling shorts ahead of the super Thursday which would have left prices very volatile.

While it is widely expected that UK rates will be kept unchanged at 0.5% for the 83rd month in a row, most of the attention willbe directed towards today’s inflation report and Bank of England Governor Mark Carney’s press conference in which investors attempt to decipher clues on future rate hike timings. It must be understood that the current economic landscape has morphed dramatically for the worst since the previous inflation report in November and this may play a tremendous role in today’s outcome. External pressures such as China’s decelerationand the incessant declines in oil prices have sabotaged the UK’s inflation goals, while domestic matters such as slowing wage growth and elevated fears over the Brexit vote have provided little incentive for the BoE to raise rates.

BoE Governor Mark Carney may attempt to reiterate his dovish stance in the press conference today in an attempt to lower the Sterling further, so that the cost of imports could increase which may consequently nudge inflation higher. Although this seems logical, the effects of his dovish mantra may be wearing off and given the heavy selloff the Sterling has experienced in recent months, a slash in inflation forecasts or a 9-0 vote with lone hawk McCafferty siding with the doves may be the catalyst for another heavy decline. Sentiment remains bearish towards the Sterling and the growing fears that global woes may force the BoE to cut rates, rather than implementing a hike should weigh heavily on the currency.

Although the GBPUSD surged to fresh three week highs at 1.4648, this has nothing to do with an improved sentiment towards the Sterling as the driving force was Dollar weakness. The rapidly fading expectations that US rates may be hiked at all this year has left the USD vulnerable and as such may offer an opportunity for the GBPUSD to trade higher in the future. This being said super Thursday and NFP Friday are heavily volatile days which will inevitably shape the path of where the GBPUSD trades in the months of February.

From a technical standpoint, the GBPUSD has breached above the daily 20 SMA while the MACD trades to the downside. A solid daily close back above 1.460 may signal a further incline towards 1.480, on the other hand, if bears reclaim control and bring prices back below 1.450 then sellers should be encouraged to send prices towards 1.440.

Euro bulls challenge Draghi

Euro bulls continue to rear their heads despite European’s Central Bank President Mario Draghi’s concerns that Eurozone inflation was much weaker than expected on the back of falling commodity prices. The Eurozone continues to suffer from not only falling commodity prices but also ongoing concerns around slowing global growth, which should have left prices vulnerable and open to further losses. Although Draghi continues to reiterate his dovish stance in a bid to talk down the Euro further, the effects may have worn off and investors currently await the decision which may take place in March. Although Draghi speaks on Thursday morning, most attention may likely be directed towards the BoE rate decision on Thursday and NFP on Friday.

The EURUSD turned technically bullish on the daily timeframe after a daily close was attained above the 1.1050 resistance. Additional Dollar weakness from a potentially weak NFP release on Friday may install EURUSD bulls with inspiration which should send price higher towards 1.1250. Prices have already cut above both the 20 and 50 SMA while the MACD also trades to the upside. If bears want to reclaim control then a solid weekly close back below 1.1050 may be needed.