Euro and Sterling On Edge Ahead of Monday’s EU Meeting (FXE, FXB, UUP, VGK, IEV, EUO)
Richard Rittorno: A quick update on euro and sterling ahead of the European Union (NYSEArca:VGK) meeting scheduled for January 23. In overnight trading the EUR/USD pushed as low as $1.2889 as traders focus on Greece as the country continues its struggle to strike a deal with private investors.
Meanwhile, the EU (NYSEArca:IEV) has announced plans to toughen the new fiscal pact for next week’s meeting. Talks between Greece and the Institute of International Finance are expected to resume today, but traders are still fearful that the deadlock between the two parties will heighten the risk of contagion of the euro zone (NYSEArca:EUO).
The outlook continues to look bleak and traders are closely watching risk sentiment.
As risk sentiment begins to look more and more bleak, the EUR/USD could continue to give back the gains made this week, and price may fall back towards the 23.6% Fibonacci retracement from the 2009 high to the 2010 low as the short-term rebound tapers off ahead of the $1.3000 level.
If the EU disappoints the markets once again, look for the euro to give back this week’s gains and retest the 2010 low. In this case, price will most likely pause around the 23.6% Fibonacci level on its way back to the 2010 low.
The pound sterling appears to be losing momentum at the 50-day moving average as appears the Bank of England will maintain its dovish outlook.
Still, the pound continued to move high today, albeit at a slower rate with the GBP/USD advancing to a new weekly high of $1.5531. However, traders may see the short-term rally taper off as the pair seems to have lost the momentum it needs to push above the 50-day moving average at 1.5581.
The Bank of England is scheduled to release its policy meeting next Tuesday at 15:00 ET. Analysts expect the comments to spark increased volatility in price, and traders may even find themselves in a major sell-off if the central bank talks up speculation for additional monetary support.
As the U.K.’s recovery slows and the risk of a double-dip recession rises, analysts expect the Bank of England to maintain a dovish outlook for the region’s monetary policy.
The Monetary Policy Committee may even find room to increase its asset purchase program beyond the GBP 275 billion target in the first half of 2012 as the committee sees an increased risk of undershooting the 2% target for inflation. This may cause the sterling to struggle to hold its ground in the week ahead, and traders could see retest of the 50.0% Fibonacci from the 2009 low to high.
Traders can use the CurrencyShares Euro Trust (NYSEArca:FXE) for the Euro and the Currency shares British Pound Sterling Trust (NYSEArca:FXB) for the British Pound Sterling as alternative to the FOREX market.
Consider a pair trade by pairing either the FXE or FXB with the Power Shares DB US Dollar Index Bullish Fund (NYSEArca:UUP).
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