GBPUSD continues advance while ECB sends EURUSD tumbling
The GBPUSD managed to continue building on its momentum from the unexpected “risk on” sentiment seen late Tuesday evening, with the pair advancing to 1.5250. A major contributor behind the advance yesterday was the UK Services PMI coming in higher than expected, with investors pleased to find out that sector activity had rebounded from the 17-month low seen in the previous month. Not only does the services sector represent such a vital part of the UK economy but all three of the PMIs announced this week (construction, manufacturing and services) have been confirmed higher than expectations, indicating that UK economic momentum has started the year strongly.
Having said that, the GBPUSD faces tough resistance around the 1.5270 area and confirmation of the Bank of England (BoE) leaving interest rates unchanged in February could inspire traders to take profit on the pair. Until the pair is successful in extending above the 1.5270 area, my assessment of the pair will remain the same. In fact, it can be strongly argued that the advance noticed over the past few days was just a continuation of a trading range set last month. Issues such as unexpected deflation risks, continually pushed back UK interest rates expectations and a domestic election in a couple of months will make investors hesitant towards purchasing the GBP. Upside gains for the Cable are still seen limited to USD weakness.
In complete contradiction to the GBPUSD, the EURUSD suffered a reversal of gains after benefiting from the sudden “risk on” sentiment from investors over the previous day. The EURUSD tumbled 160 pips from 1.1483 to 1.1315 following a European Central Bank (ECB) statement announcing that it would no longer accept Greek government bonds as collateral for lending money to Greek banks. The markets saw this sudden emergence as a major indication that the meeting between Greek Finance Minister Yanis Varoufakis and ECB President Mario Draghi had basically not gone too smoothly. Either way, the move from the ECB does indicate further uncertainty over Greece reaching an agreement on its bailout programme with the rest of the Eurozone.
Later today the Greek Finance Minister will meet with the German Finance Minister, Wolfgang Schaeuble. It is widely reported that the German Finance Minister has a tough stance on the Greek debt situation, meaning the Euro faces another downside risk today if uncertainty over whether Greece will be able reach an agreement over its debt continues to elevate.
Finally, the unexpected comeback in the price of crude oil came to an abrupt conclusion on Wednesday. Both WTI and Brent declined by over $3 following traders being politely reminded that the aggressive oversupply in the markets is still present, and perhaps even growing. Data yesterday afternoon showed that US Crude Oil inventories over the previous week had rose by nearly double the expected levels over the previous week. This just reaffirmed the supply and demand equation that has repeatedly been highlighted, with the equation still remaining in favour of lower prices.
The bulls just found an excuse from the unexpected drop in the number of US oil rigs as an excuse to push the price temporarily higher, in the hope that the drop might be an indication that oil producers could have been potentially reacted to the oversupply. This doesn’t appear to have been the case but having said that, the surprising $10 advance over the previous days does highlight that there are still buyers for the commodity.
Written by Jameel Ahmad, Chief Market Analyst at FXTM.
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