Forex Analysis. The Banks Are Coming Into Alignment

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4 min

Less than 24 hours ago the market was eagerly anticipating a round of central bank policy updates. Not one but 3 major world central banks released statements and not a single one delivered news capable of moving the markets. What the market got was a whole lot of blah; mixed indications and uncertainty in a world of policy transparency. The take away is this; global economics are improving, there is a better chance for policy tightening than loosening which means global central bank policy will soon come into alignment.
Starting with the FOMC. The US central bank raised rates by a quarter point, as expected, but toned down their forward outlook. The bank says inflation will run below their target 2% for the next year and gives no reason to accelerate the pace of interest rate hikes. They stand pat on the expectation for 3 hikes in 2018 with a possibility of less should inflation remain low. At face value the statement and follow up press conference did little to strengthen the dollar leaving it trending sideways within near term ranges versus the euro and the pound.
The BOE stood pat on their policy after raising rates for the first time in nearly 10 years last month. The target rate is 0.5%, just off the historic low, and expected to remain low into the foreseeable future. The bank is using low rates to shelter a “fragile UK economy” as it navigates Brexit. The vote was 9-0 in favor of standing pat despite signs of rising inflation. Earlier this week CPI data came in above 3.0% and well above target rates. The GBP/USD moved higher on the news, but the gains were capped by resistance. The move extends a bounce from the moving average and is potentially bullish although the indicators remain mixed. Resistance is possible at 1.3450, a break above there may go as high as 1.3500 or 1.3550 before hitting next resistance at the top of a 4-month trading range.
GBP/USD moved down
The ECB also refrained from altering policy, leaving their target rate in negative territory and the monetary taps wide open. The statements and comments from Mario Draghi indicate rates will remain at low levels for an extended period of time with the possibility of additional stimulus should the economy need it. The EUR/USD traded up in the early part of the session as the dollar weakened on FOMC policy, but those gains were capped following the ECB announcement; both banks have backed off on their outlook offsetting weakness in their respective currencies.
The pair is trading up following a moving average crossover and indicated higher. The risk is that it remains inside a trading range with no reason to break out. Targets for resistance are 1.1900, 1.1950 and 1.1200.
EUR/USD graph
The EUR/GBP moved exactly sideways on the news. The pair is creating a small doji like candle to the side of the last four candles with resistance at the 30-day exponential moving average. Support is near 0.8800 and the bottom of a 4-month trading range. The indicators remain mixed with a bias toward the downside.
EUR/GBP graph
A drop from this level would confirm resistance at the moving average and possibly take the pair down to support. A break below 0.8800 would be bearish with a target near 0.8700 and possibly lower.
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