Alpesh Patel's NEWSLETTERPRO – Euro drops like a stone on Euro-zone inflation report, Pound holds strong but for how long?

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MORNING BRIEF

The Single European currency had a nightmare session yesterday as it recorded its biggest drop in 18 months. The sell-off rally was spurred by weaker inflation data from the European region as the inflation in the Euro-zone has dropped at 0.7% in October which is the lowest level in nearly four years. Adding fuel to the fire, comments by ECB governing council member Nowotny drove investors away from the Euro even more as he suggested that the central bank could continue to provide more liquidity via another LTRO program when the current one expires next year. This combination of events drove the Euro as low as 1.3550 dropping almost 150 pips in one day and if this weakness is to continue then we could see the currency threaten the critical support of 1.3500. On the US Dollar front, it was a rather mixed day for the US currency as it gained ground against the Euro and the Swiss Franc but held steady versus the Pound and the Yen. Recent data appeared better than expected but it is apparent that investors are a bit skeptical regarding the validity of these reports hence they stay on the sidelines. With ISM Manufacturing Index coming out today we could see a surprise higher against expectations for slowing down but we believe that Dollar’s reaction to this release will be limited. Finally, the British Pound held strong above the 1.6000 level and is trading near the 1.6020 mark at this time unfazed by the radical drop of the Euro. Today, the British PMI is to be released and we could see some movement on the Cable following the release of this important piece of information.

British PMI and ISM Manufacturing on the docket today

For the last day of the week the Economic Calendar holds only 2 significant events: the British Purchasing Manager Index coming at 9.30 is expected to decline and a possible surprise here to the downside could send the Pound lower to threaten the 1.6000 support. Later in the day, the ISM Manufacturing Index is also scheduled for release today at 14.00 and although analysts expect a decline we will focus our attention on this release as a surprise higher could come into play.

Economic Calendar

Time

Currency

Event

Importance

Forecast

Previous

09.30

GBP

PMI Manufacturing

Medium

56.4

56.7

14.00

USD

ISM Manufacturing

High

55.1

56.2

 

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TECHNICAL ANALYSIS & LEVELS

EUR/USD

Euro had a radical drop yesterday and hit our second target at 1.3600 in late European session. The Single currency settled near the 1.3550 mark and we expect that a retracement higher might be in play today as yesterday’s decline was a steep one. For the day, we will stand aside and let the Euro breathe as we wouldn’t want to engage into any kind of trades with the pair in such extremely oversold levels. We will take home our profits for this week and enjoy our weekend. From a technical point of view, we will need to see whether the currency will climb back above the 1.3600 mark as it now appears as a critical level of resistance.

GBP/USD

The Pound remained largely unchanged yesterday with the British currency not following Euro’s decline. For the day ahead, we have the British PMI report coming in and this could provide some friction for a move outside this tight range. We have a short trade already in play with our stops placed at the 1.6085 level as we’re targeting the 1.5900 level, having closed the first 50% of the trade previously. We will remain patient and wait for the currency to pick up momentum, as said above our stops and targets are set and we need to wait it out. However, should for any reason the Pound reach higher and take out our stops at the 1.6085 level and continue moving higher then we could try a long entry right there with targets at 1.6120 and 1.6190 and a stop placed just below the 1.6000 mark.

FTSE 100

The FTSE 100 fell yesterday as it continues its retracement lower after reaching the 6,800 points level. We have no suggestions for you today as it is critical to see how far down will this retracement continue prior to suggesting any trades. A critical level of support is the 6,700 points and should this and the 6,650 points level be breached then a downtrend will be confirmed but for now we wish to remain on the sidelines until we can better assess FTSE’s prospects.

Gold

Gold fell yesterday and triggered our short entry at the $1,328 level. We are now targeting the $1,310 and $1,278 marks but our stop will be placed at the $1,342 area as the resistance level of $1,338 along with the combination of the 55 and 200-period EMAs should provide enough cover for our short trade. Gold has been in an uptrend recently but it seems that it is now turning lower as the demand for Dollars is causing the yellow metal’s price to decline.

All charts have been created using FXCM’s Trading Station platform.

Enjoy a lovely weekend.

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