Overextended EUR pairs

EURNZD and EURGBP, Daily & Monthly

Eurozone prel Aug PMI unexpectedly improved in the composite number. Individual readings were mixed, but the unexpected rise in the manufacturing reading to 57.4 from 56.6, still helped to compensate for the dip in the services reading to 54.9 from 55.4 and left the composite at 55.8, up from 55.7 in the previous month. Expectations had been for a steady to lower number, so the unexpected improvement and the strong manufacturing reading have added further pressure on Bund futures, which already dipped on the German numbers earlier. The ECB has already acknowledged that the recovery is strengthening, but remains firmly focused on still weak inflation and wage growth, arguing that the recovery still needs substantial monetary support. And with officials fretting about the strong EUR and the possibility of market over-corrections it is still expected Draghi to hold back with comments on tapering at the Jackson Hole meeting.

Meanwhile on today’s speech, Draghi hailed QE and forward guidance as success, saying that research showed that while forward guidance is “a useful instrument” “its effectiveness can be improved with other non-standard monetary policies”. Speaking at a conference on economic science Draghi said “research has confirmed that central banks are not powerless at the effective lower bound”, but stressed that policy makers must continue “preparing for new challenges”, and that “when the world chances”, policies and “especially monetary policies need to be adjusted”. Nothing there that directly refers to the future of QE.

On the announcement of data and President Draghi speech, we have seen EUR getting stronger and therefore some EUR crosses to get overextended upwards, such as EURNZD and EURGBP. EURGBP hit a seven-year peak of 0.9208 (seven-year when discarding the peak seen following sterling’s flash crash on October 6 last year)  In Both pairs, RSI is at overbought area and therefore with an intraday signal of downwards correction , we are looking for a Short position in a short timeframe however, since will possible be a correction of the trend. Hence these two are one to be watch.

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Andria Pichidi

Market Analyst


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