The British pound tends to be the main topic in the days ahead and traders should prepare for high volatility in all GBP crosses. The pound gapped down over 1.5 percent at the open of the trading week as the market is positioning for hard-Brexit rhetoric from U.K. Prime Minister Theresa May on Tuesday.
While uncertainty around Brexit has persisted since the Brexit referendum, we may get some element of clarity on Tuesday when PM Theresa May delivers a speech in which she will present her plans for Britain’s exit of the European Union. Recent comments from May have appeared to indicate that a hard Brexit and thus a clean break from the European Union's single market may be more likely. The pound sterling therefore has been put under increased pressure by fears that May will signal plans to quit the single market, even though the prospect of higher inflation has been a bullish driver for sterling.
On Tuesday we also have the U.K. Consumer Price report scheduled for release, which may provide some relief for the pound, provided that May won’t choke off any recovery by supporting hard Brexit fears. Tuesday will therefore be a high volatile trading day for sterling traders.
GBP/USD
The cable opened this week significantly lower, showing a gap of more than 150 pips. As market participants prepare for the idea of a hard Brexit we expect the pound to remain under pressure ahead of May's speech. Nonetheless, bullish price action may tend to close the gap (as is often the case with gaps) before we see a next leg down. With that in mind, the lower trend line at around 1.20 may proves as a short-term support for the pound. In case the pound declines below 1.1970/60, we expect further losses toward the flash-crash low at 1.1919.
For euro traders, the European Central Bank’s policy meeting will be this week’s highlight. On Thursday the ECB will meet for the first time this year but no changes to monetary policy are expected. However, ECB President Mario Draghi’s rhetoric may cause some volatile swings in the EUR/USD.
EUR/USD
After having rejected the 1.0685-level, prices formatted a symmetrical triangle, whereby chances of a bearish breakout are currently more likely. If the euro falls below 1.0580 we see a higher likelihood of a downward move towards 1.05/1.0480. On the other side, if the euro breaks above 1.0665, it may head for a test of 1.07.
This week might get off to a quiet start as U.S. markets will be closed for Martin Luther King Day on Monday. Apart from the U.S. presidential inauguration on Friday and the U.S. Consumer Price report on Wednesday, the U.S. dollar could receive less attention this week.
Here are our daily signal alerts:
EUR/USD
Long at 1.0675 SL 25 TP 20, 35
Short at 1.0570 SL 25 TP 20, 40
GBP/USD
Long at 1.2075 SL 25 TP 30-40
Short at 1.2010 SL 25 TP 30-40
We wish you good trades and many pips!
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