The EUR/GBP waits for the ECB press conference

By FX Empire Analyst - Barry Norman
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Today once again is an important central bank day. Markets will hear from both the BoE and the ECB today. The BoE will make an interest rate decision and markets are not expecting a change to the interest rate nor an announcement of additions to the BoE’s QE program. Their view is that the focus of this meeting will not be on the decision – that is a non-event. It will be on the minutes and commentary surrounding the meeting to give us clues to the outcome of the November meeting at which further QE should be on the table. The same holds true for the ECB, the focus will be on what ECB President Draghi has to say about the ECB’s bond buying program, the ECB’s transformation into Europe’s bank regulator, and other subjects related to the ongoing sovereign debt crisis at his press conference which will be followed by Q&A.  As the policy response to Europe’s debt crisis is now largely being driven by President Draghi, his remarks take on added significance.

Yesterday the EUR/GBP continued its gradual comeback off the 0.7924 low that started mid last week. EUR/GBP tested bids below the 0.8000 figure on a poor Spanish Services PMI. However, the euro remained well bid across the board and EUR/GBP turned north again. The UK services PMI was also below consensus. EUR/GBP set another minor new correction top at 0.8024, but after all the report had no lasting impact. Global sentiment on the single currency was still the key driver. The euro took a breather late in the morning session, but soon found again a better bid as any downticks were seen as an buying opportunity. The 0.8000 area was well protected and the pair even reached another reaction top at 0.8033 at the close in Europe. The pair is still holding near that level in Europe.

The focus for EUR/GBP trading will be on the ECB rather than on the BoE meeting. In the EUR/USD part of this report we argue that message from the ECB press conference shouldn’t be that negative for the euro and this applies also to EUR/GBP. It is still early days, but after today’s BoE meeting, markets will gradually start to ponder the chances for more easing from the BoE next month. All this sounds like EUR/GBP supportive.

Technically speaking the EUR/GBP reached a correction low at 0.7755 at the end of July. The commitment of ECB’s Draghi to do whatever is needed to protect the single currency triggered also a U-turn in EUR/GBP. The price action in both EUR/USD and cable is for an important part driven by the dollar side of the story. In a risk-on context, EUR/USD tends to outperform cable, thus supporting EUR/GBP. As the risk-rally ran into resistance, the balance between EUR/USD and cable changed, too, pushing EUR/GBP into a correction.

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