Central Banks Continue to Dominate

Following on from our report last week, we will start today’s currency report by checking in on EUR/GBP. We mentioned last week that we would be monitoring this currency pair closely for signs of a continuation of the trend lower in Euro and of course conversely higher in Sterling.

We mention this all important 1.20 level in GBP/EUR terms, which comes in at 0.8333 in EUR/GBP. We have attempted to break the level and close below since the first trading day of January – however, we have failed to get a close below the 0.8333/above 1.20. As you can now see from the chart below – technically it would appear that EUR/GBP is forming a short term base at 0.8333 and now looking to break out of the recent range to the topside.  0.8381 is now the pivot to the topside and should provide initial resistance.

A clean break above this level opens up the 0.84 zone, a break of which would add further momentum to the topside. The overall medium term down trend in EUR/GBP is still intact, however, given we could not break and close below 0.8333 (GBP/EUR 1.20) in the short term, may mean we see a bounce in EUR/GBP for a week or so, before we can resume the downtrend.

The dominant theme for 2022 will be the actions of global central banks and the enormous impact these actions will have on the financial markets. Global central banks are pivoting away from monetary stimulus, with many signaling they are entering the beginning of an interest rate hike cycle – mostly notably the US Federal Reserve.

We have become accustomed to interest rates at zero and low levels of volatility in the currency markets over the past number of years. With central banks indicating they are looking to increase interest rates and therefore interest rate differentials coming into play amongst currency pairs, we should in theory see increased volatility in the currency markets over the course of 2022.

The market can get a little ahead of itself with this theme as seen in EUR/USD over the past number of trading sessions. Euro has rallied since early last week – nearly 2%, as the market turned its attention to the ECB and its concern over rising inflation – see chart.

It appears that the market was too quick to place the ECB into the bucket of central banks on the verge of hiking and we have seen a subsequent retracement of the rally last week. This now appears to be a false break higher in Euro as we fall back below the important pivot at 1.1380 – see chart.

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