Daily Market Analysis: 8 December 2016
by Christala Parmaxi, CFTe
ECB Policy Meeting
Despite the negative outcome of the Italian Referendum which boosted EURUSD to reach a 20-months low, the world’s most traded currency bottomed at 1.05 and it is now trading around 1.08. The big event of the day which will determine the direction of the Euro, and especially EURUSD, is the last ECB policy meeting which will take place today. The ECB will announce its interest rates decisions at 12:45 GMT while later at 13:30 GMT ECB President Mario Draghi will follow with a press conference. The current Deposit Facility Rate is 0.4% while the Interest Rate is near 0% with the ECB President highlighting that he does not support negative interest rates policies whenever he gets a chance. The rates are widely expected to remain unchanged, however the reason that we are looking forward to ECB’s policy meeting is firstly the QE program and whether the Bank is going to extend it or not. The current scheme supports the end of the bond purchases program by March 2017 while most of the analysts around media expect an extension of the purchasing program for 6 months. Because of the great extent that the market has given so far to the extension of 6 months, we believe that this information is already priced in the market and we wouldn’t expect any extreme downside movement by Euro on this announcement. However, if Mario Draghi announces a longer extension of the program or adding more bonds-purchases than the current scheme of EUR80 billion per month, then we would expect EURUSD to fall further going back to 1.07 or even lower.
On the other hand, there are still rumors for tapering of the QE program and whether ECB is going to prepare the ground for such an announcement in the future or keep it low until the next policy meeting. They say that history has the tendency to repeat itself and looking back in December 2015, the Euro was trading again at its lower point of the year around the end of November and on December it expanded, right after the last ECB policy meeting of the year, despite the fact that ECB cut the rates on this meeting. If Mario Draghi refers to the tapering of the program or bond purchases are reduced, then EURUSD will most probably adopt the same behavior with December 2015 and expand most likely up to 1.09. The Economic releases after the last ECB meeting were mostly positive for the Union, with Inflation Data, unemployment rate and retail sales improving.
Bank of Canada Policy Meeting
The Bank of Canada has its policy meeting yesterday where it kept the current monetary policy unchanged and the interest rates steady at 0.5%. The policymakers stated that the growth in Q4 2016 was moderate but in Q3 it was strong, thus the current monetary policy scheme remains appropriate in their view. Despite the fact that Canada’s inflation advanced in the past few months, it is still below the target. BoC Governor Poloz did not refer either to the OPEC meetings and deals neither to Trump’s victory; when asked about Trump, he said that it is too soon to take any measures and measures will be taken if the economy anticipates any shocks in the near future. The policy meeting didn’t reflect on the Canadian Dollar in any way since it kept on moving higher against the US Dollar and the Great British Pound while it fell against the New Zealand Dollar and remained unchanged against the rest of the majors. However, it was mainly driven by the weakness of the Pound and the strong momentum of NZD.
Majors Daily Performance
The greenback closed the day lower against all of its major counterparties, except the Great British Pound which was the big looser of Wednesday closing the day 0.4% against the US Dollar. The Dollar lost its bullish momentum while the rest of the currencies are driving the market. The Cable and most of the GBP pairs depreciated against the Pound yesterday, after the acceptance of the government to reveal Brexit plans by the end of March 2017. Meanwhile, since there is momentum in oil, Euro and other currencies, investors are not feeling like buying the Gopher and they drive it lower below the level of 114. We would expect the pair to fall further within the next few days.
Our view on the correction of the major pairs for the last 2 days has been proven correct and the pairs are still moving around our anticipated levels.
The world’s most traded currency is trading higher for the last few days while there is a bullish cross between SMA50 and SMA100 on the 4-hour chart. The pair is attempting to break the resistance of SMA200 at the psychological level of 1.08 at the time of writing, but ECB meeting will be critical for its next moves. ADX indicates overextended positive direction, MACD and RSI are both on bullish territories but MACD is slopping upwards while RSI is slopping downwards. The critical supports are near the levels of 1.07, 1.068 and 1.064 while the significant resistance levels are close to 1.08, 1.084 and 1.091.
The Cable corrected down to the expected level of 1.257, it found support on SMA200 and it is now moving to the upside. The pair crossed SMA50 and SMA100 to the upside while there was a bearish cross from SMA50 to SMA100. In our view, the psychological level of 1.27 is critical of whether the uptrend of the pair will hold or the correction will end up in a trend reversal. If the pair closes above 1.27 then we would expect further expansion up to 1.274 and upon penetration up to 1.277. On the flipside, the downside risks are near 1.262 and 1.257. A cross below 1.257 will most likely indicate a trend reversal. The indicators are running on bullish levels while ADX indicates positive direction.
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