The dollar sold off sharply on comments from Federal Reserve officials suggesting that the rate cycle is nearing its peak. This was already sidely expected, but the market took it as a green light to sell the greenback, so we saw cable and EURUSD rocket through the major resistance levels at 1.7810 and 1.2200/10 respectively. Both of these pairs have now recaptured the long term trend support, which means we could see further gains.
With US inflation under control, and interest rates unlikely to surprise, the theme is likely to return to the over growing US trade deficit, which is generally a big drag on the dollar. A weaker dollar helps to improve the trade balance.
The Fed’ comments were compounded by ECB economist Otmar Issing’s statement on Saturday that the “upswing [in the Euro economy] is continuing and strengthening”. This increases the chances of further rate rises in the near term. Currency strategists surveyed since the statement have turned 53% bullish on the Euro from only 24% a week earlier.
The comments also helped the Euro against sterling, and as expected we are once again testing the 1.4500 support. My view is that we will break lower in due course.
We have CBI Industrial Trends at 11:00 in the UK.
GBP EUR – Support 1.4500, 1.4475 then 1.4350
Resistance 1.4610 then 1.4680
GBP USD – Support 1.7810, 17745 then 1.7700
Resistance 1.7890, 1.7905 then 1.8150
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