With the dollar strengthening recently, flying prices of specific stocks, and the blow-off top in silver, we could say we are in interesting times in the markets. However, such strange price moves driven purely by speculation warrant more caution, and more carefully picking potential trading opportunities. While the Fx market wasn’t affected much by the recent wild swings in the GameStop stock and silver, the lack of a clear theme and trends in Forex also highlights the “confused” (or directionless) phase the market is in right now.

 

The COVID pandemic and the rate of vaccinations remain in the driving seat for currencies. Here, it is expected that those countries which are leading the vaccination race will outperform the countries that are slower at vaccinating their population. With the UK and the US leading the race among big economies, the question, are we headed for a period of some USD and GBP strength? 

 

 

Instead of sending our usual trade idea, this week we’ll discuss the Bank of England meeting and the EUR/USD pair.

The main risk for GBP this week is that the Bank of England could be somewhat more pessimistic and dovish than is currently priced in (expected) by markets. And the central bank has good reasons to do so. While vaccinations are going well, the lockdowns are still in place, and the fight with the pandemic is far from over. Moreover, the economic impact from the December lockdowns is still greatly felt. So, the Bank of England has “good” reasons to maintain a strong dovish stance.

 

Fx traders, however, will most closely follow their forward guidance on negative interest rates. If they say that negative rates are still part of their toolbox that they can use in the future, GBP could sell-off in disappointment. The bulls are hoping that the BOE will completely drop negative interest rates as an option. If they do this, GBP can extend the current uptrends, where EURGBP looks particularly vulnerable, having recently broken below the 0.89 support.

 

Still, even such a BOE-induced sell-off in GBP is likely to prove as temporary, and potentially, a good GBP buying opportunity. This would be in line with our short EURGBP trade idea from last week, where we expected it to initially correct higher and then drop to lower lows. The price has continued to move gradually lower, but perhaps the BOE tomorrow can give us a bounce we can sell?

 

The pair also hit the wider 1.20 support area yesterday and is bouncing there (support was highlighted in our weekly analysis for this week). Although no substantial bullish signal has formed here yet, the strong confluence support at 1.20, which is also psychologically important, suggests that the bulls should hold their ground on this attempt.

 

However, even if a near-term low may be in around 1.20, it doesn’t mean EURUSD will head much higher. Instead, it looks more likely that EURUSD hobbles sideways for a few weeks because the positive EUR fundamentals that drove the uptrend last year have weakened recently. Without the favorable EUR divergence over the USD, it’s hard to imagine a sustainable breakout higher and extension of the uptrend.

 

 

 

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