As certain as some traders were that the EURUSD would hit 1.4, just 34 pips away, Federal Reserve chairwomen Janet Yellen delivered a blow with her vague interest rate policy. The FOMC minutes sent the EURUSD declining over 200 pips to mark a new two-week low of 1.3748.
There was some nibbling from bottom-feeders, and the pair closed just under 1.3800. Eurozone consumer confidence last week came in higher than expected, negative 9.3 versus February’s negative 12.7. However, the divergence of central bank policies between the European Central Bank (ECB) and the Federal Reserve will continue to cause sentiment digression in the pair. With the Fed funds rate expected to reach one percent in early 2015, economists still see the ECB to keep interest rates at historical lows. ECB President Mario Draghi continues to drive home that the recovery is feeble, and low rates will be needed for an extended period of time. However, as inflation continues to stagnant, along with the economic data, the small fraction of analysts seeking a rate cut exist.
This morning, manufacturing PMI data out of Germany, France, and the eurozone composite will help traders gauge the data trend. France’s manufacturing sector still remains in contraction, but analysts see a slight uptick in March. Analysts forecast a one-tenth point drop in March’s PMI.
The price action’s ability to close above 1.3800 could be key in determining EURUSD short-term direction. Over the last two months, price action has trended tightly in an ascending channel, The FOMC-related drop put pressure on the support, which finally gave out in subsequent trading.
The euro is up 6.8 percent against the dollar over the last year and 1.8 percent over the last six months, including the recent decline. Traders are likely taking profits while trying to piece together central bank policy with the Rosetta Stone.
Upside resistance will be seen at 1.3815 with minor resistance at 1.3835. If price action can jump back into the channel, resistance at 1.3900 would be next. However, the pair would likely begin to consolidate, leaving support at 1.3745 open.
GBPUSD broke lower through a consolidation channel and fell below 1.6500, reaching a levels not seen since mid-February. Traders grow weary of the Bank of England (BoE) and the uncertainty surrounding their interest rate policies. The potential increase in the Fed funds rate by early-2015 is turning the favoritism toward the US dollar. Lee McDarby, executive director of U.K. corporate foreign-exchange sales at Nomura, said “if sterling is to surge, real news on interest-rate hikes is required>” And that is unlikely over the short-term.
Last week’s bearish outlook for GBPUSD was spot on as price action tested and broke all key support levels: “price action has grown bearish as price continually tests the lower bounds of the consolidation channel. A close below the channel will signal a steeper move downward the 50 EMA at 1.6550, while additional support will be located at 1.6520 and 1.6545.”
Currently, price action is straining support at 1.6465. If broken, the Sterling would trade lower against the dollar and trend toward 1.6385. A pullback to 1.6550/60 is probable.