EUR/USD and GBP/USD Diverge – ECB and BoE Preview

EUR/USD and GBP/USD Diverge - ECB and BoE Preview

EUR/USD and GBP/USD Diverging:
The EUR/USD is marking new lows on the year as we get into the 12/3 US session, with the ECB monetary policy decision ahead in the 12/4 session. Meanwhile, the GBP/USD is bouncing off its month-long consolidation lows, showing resilience ahead of tomorrrow’s BoE event.

EUR/USD 4H Chart 12/3
eurusd 4h chart 12/3
(click to enlarge)

Fresh Low on the Year: The EUR/USD pushed below its month-long consolidation support of 1.2357 and is signaling bearish continuation. Note that price is now under the 200-, 100-, and 50-period SMAs, which are sloping down and in bearish alignment. The RSI has also tagged below 30, showing bearish momentum.

QE Expectation: Now, the market is showing expectation of QE ahead of tomorrow’s ECB decision. Draghi and company has recently been showing concerns of low inflation and have revealed that the ECB is pursuing more of the current stimulus measures before QE. If the ECB statement maintains this position, the EUR/USD should remain pressured. If there is a pullback, we should see sellers in the 1.24-1.2420 area.

Bearish Targets/Supports: To the downside, EUR/USD is poised to test a support pivot around 1.2285 (from 2012) up to the 1.23 handle, with risk of continuing towards the 2012-low of 1.2041. The width of the consolidation range was roughly 220 pips. 220 pips projected below 1.2357 targets the 1.2137 area.

GBP/USD continues to consolidate in a choppy but sideways consolidation since mid-November when it first established the support near 1.5585. We have seen 2 more failed attempts to break below this low, and as we get into the 12/3 US session, it is rebounding before even approaching this low.

GBP/USD 4H Chart 12/3
GBP/USD 4H Chart 12/3
(click to enlarge)

UK Services PMI: The 4H chart shows that cable is getting a boost after the UK services PMI data, which surprised forecasts. The reading for November came in at 58.6, higher than the 56.2 print in October, and beating forecasts that averaged around 56.6.

BoE Watch:
Hawkish Scenario:Data have been stabilizing a bit in the UK, so it will be important to see if the BoE acknowledges that, and whether it will talk about forward guidance for a rate hike, or reducing its asset purchase program. This would be a hawkish scenario that should help support the GBP/USD.

Dovish Scenario: There are 2 MPC members who have been voting for a rate hike. If 1 or both of them shift their votes to a hold, the perception of the BoE will turn more dovish.This will reduce the likelihood of a rate hike in Q1/Q2 of 2015, and will likely push expectations to the latter half of the year. With a dovish tone, the GBP/USD should break below 1.5585, with the 1.55 handle in sight, and with risk of falling towards some common lows since 2011 around 1.53-1.5350.

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at