There is such a thing as too much of a good thing, and the eurozone found that out as the euro reached its highest level against the US dollar in a year.
The positive outlook the European Central Bank gave to the eurozone helped the single currency climb higher against the US dollar, which is a sign of how much confidence investors have in the region, but it weighed on equity markets in continental Europe.
The ECB's loose monetary policy, combined with the mediocre economic health of the region, encouraged international investors to pour money into the continent, but now the improved economic indicators have pushed the euro higher. The bullish sentiment surrounding the euro has prompted traders to cash in their European equities. The ECB is intending on keeping its policy as it is for the foreseeable future, but the underlying currency move tells us what traders are thinking.
Germany and Spain posted an increase in inflation, and dealers will be focused on the flash eurozone CPI data at 10am today. The consensus is for the report to come in a 1.2%, for June, and that compares with 1.4% last year. ECB president Mario Draghi already anticipates lower inflation in the area over the next few years, but some traders suspect that it's an easy way for him not to talk about tightening monetary policy.
The UK will announce its final reading of first-quarter gross domestic product at 9.30am, and traders are expecting a reading of 0.2% and 2%, on a month-on-month and year-on-year basis respectively. The governor of the Bank of England, Mark Carney, announced this week that some of the stimulus package could be removed. Equity investors were spooked by this possibility, and the soaring pound made matters worse.
Ultimately, a growing economy will usually translate into a higher domestic stock market, but when a loose monetary policy must be reined in first, it can shake out some of the buyers that piggy-backed on the monetary easing programme.
The US economy grew faster than expected in the first quarter of 2017, and this could justify the Federal Reserve’s plans to keep tightening their monetary policy. The US central bank aims to raise interest rates and reduce the size of their balance sheet later this year. The US economy is performing well but it will need to keep moving forward before any additional monetary tightening. The personal income and spending reports at 1.30pm, and the University of Michigan consumer sentiment survey at 3pm (UK time) will be in focus today.
EUR/USD – yesterday the currency pair surged and it cleared the resistance at 1.1428 – which is now acting as support. If the support at 1.1428 holds, the resistance at 1.1495 will be the next price to watch. A drop back below 1.1428 could see it return to 1.1300.
GBP/USD – traded through 1.3000, and is receiving support at 1.2977. If the supports holds, bulls will be looking to 1.3047 and 1.3120. A break below 1.2977 could bring the support at the 50-day moving average at 1.2868 into play.
EUR/GBP – 0.8770 is providing support, and if the level holds the resistance at 0.8844 and 0.8880 will be the upside targets. A break below 0.8770 would bring the support at 0.8738 into play.
USD/JPY – the 100-day moving average at 111.80 is acting as support, and bulls will be looking to the resistance at 113.00 and 114.36. A move below the 100-day moving average at 111.80 will put the 200-day moving average at 111.19 into sight, and 110.30 is the next support level.
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