The Bank of England’s monetary policy decision is the key event of the trading day. Should it be more hawkish than expected, the pound may rally aggressively.
The price action so far in the trading week reflects the power of trading algorithms over markets. Some of the most active market participants are high-frequency trading venues that buy or sell automatically, based on how they are programmed.
During the NFP week, the market is typically quiet, despite important economic data coming out during the week. Simply put, no one takes any chances, and therefore the trading algorithms dominate the price action.
As such, the EUR/USD pair is simply glued by the 1.20 level, with little or no movement. The same is valid for other currency pairs, and things are likely to remain unchanged until tomorrow’s NFP release.
The stock market indices remain bid, as the Dow Jones traded back above 34,200 yesterday. Moreover, the futures market points to more strength, and this should help the European indices in the session today.
On the commodities front, gold still struggles at the $1,800 level, but it trades with a bid tone. The technical picture and fears of inflation in the upcoming months also bode well for the yellow metal. Oil remains bid above $65/barrel, as the market focuses on the strong economic recovery seen in a post-COVID-19 pandemic world.
Today it is all about the Bank of England and its monetary policy decision. Some tapering is priced in, but the unknown comes from how much is already priced in by the market participants.
The expectations are that the central bank will tune down its asset purchasing program from GBP4 billion/week to GBP3 billion, signaling the beginning of the end of the lax monetary policy. As such, the British pound may be all over the place today, with particular interesting moves on the GBPUSD and EURGBP pairs.
Markets to Watch
XAU/USD, GBP/USD, EUR/GBP – markets in focus today.
Gold has met resistance against a horizontal area just shy of the key $1,800 level. When this occurs, the bias is that the market forms a continuation pattern known as an ascending triangle. An ascending triangle’s measured move points to more strength toward $1,840, should we see a daily close above $1,800.
The GBP/USD waited for quite some time for today’s Bank of England’s decision. The triangle forming on the 4h chart shows the market’s uncertainty and the tight ranges seen forming just below the 1.40 level. Speaking of the round, psychological level, we may see another attempt to move above, should the Bank of England sound more hawkish than the market expects.
The EUR/GBP cross pair formed a possible double top formation – a pattern that resembles the letter M. At this point in the pattern’s formation, there is still plenty of room for a decline to the target, suggesting that the Bank of England’s decision may favour a stronger pound.
Winners and Losers
With the US equity indices back at its highs, it is difficult to pick a different winner for the week. The dollar remains offered on the back of stronger equity markets and inflation fears.