Incisive market commentary from David Morrison

Stay ahead with our market commentary and webinars from our in house market strategist

Open a Live AccountOpen a Demo Account
+ Show blog menu



Collapse 2017 <span class='blogcount'>(348)</span>2017 (348)
Collapse November <span class='blogcount'>(26)</span>November (26)
Markets drift ahead of weekend - AM Briefing
24 Nov 2017
US closed for Thanksgiving - AM Briefing
23 Nov 2017
Wall Street hits fresh record highs - AM Briefing
22 Nov 2017
The UK100 and sterling - PM Bulletin
21 Nov 2017
Equities drift in featureless trade - AM Briefing
21 Nov 2017
German coalition talks collapse - AM Briefing
20 Nov 2017
Quiet start after Wall Street surge - AM Briefing
17 Nov 2017
Global stock indices steady - AM Briefing
16 Nov 2017
Is this the start of a stock market correction? - Video Update
15 Nov 2017
Crude sell-off rattles investors - AM Briefing
15 Nov 2017
GBPUSD testing support - PM Bulletin
14 Nov 2017
Central bankers meet in Frankfurt - AM Briefing
14 Nov 2017
Sterling under pressure - AM Briefing
13 Nov 2017
Indices in retreat ahead of weekend - AM Briefing
10 Nov 2017
Could low volatility trigger a market correction? - Video Update
09 Nov 2017
All quiet on the Western Front - AM Briefing
09 Nov 2017
WTI crude surges through resistance - Video Update
08 Nov 2017
Investor inertia sees equities drift - AM Briefing
08 Nov 2017
Crude in demand - PM Bulletin
07 Nov 2017
Fresh record close for Wall Street - AM Briefing
07 Nov 2017
EURUSD shows clear “head and shoulders” - PM Bulletin
06 Nov 2017
Cautious start to trading week - AM Briefing
06 Nov 2017
Traders look ahead to Non-Farm Payrolls - AM Bulletin
03 Nov 2017
Traders look ahead Friday’s US Non-Farm Payrolls - Video Update
02 Nov 2017
BoE expected to raise rates - AM Briefing
02 Nov 2017
Equities soar on US corporate tax cut hopes - AM Briefing
01 Nov 2017
Expand October <span class='blogcount'>(24)</span>October (24)
Expand September <span class='blogcount'>(33)</span>September (33)
Expand August <span class='blogcount'>(26)</span>August (26)
Expand July <span class='blogcount'>(32)</span>July (32)
Expand June <span class='blogcount'>(28)</span>June (28)
Expand May <span class='blogcount'>(35)</span>May (35)
Expand April <span class='blogcount'>(31)</span>April (31)
Expand March <span class='blogcount'>(38)</span>March (38)
Expand February <span class='blogcount'>(36)</span>February (36)
Expand January <span class='blogcount'>(39)</span>January (39)
Expand 2016 <span class='blogcount'>(483)</span>2016 (483)


Consequently, the path of least resistance suggests a weaker euro and a stronger dollar.

Over the past week or so we’ve looked at both the GBPUSD and USDJPY in the context of monetary policy meetings from the Bank of England (BoE) and Bank of Japan (BoJ). Now these meetings are behind us, as are those from the US Federal Reserve and European Central Bank (ECB), it’s worth considering the most heavily traded currency pair - the EURUSD. We can do this in terms of what we think we know about the likely timing and rate of future monetary tightening from the world’s two major central banks - the Fed and the ECB.

But first off, some background. If we look at the EURUSD chart below we can see that the euro rallied sharply over the first nine months of the year. The EURUSD rose from a 14-year low around 1.0350 to a two-year nine month high just below 1.2100 at the beginning of September. But the dollar has recovered since then and it’s possible that this could be a trend reversal rather than a corrective move. Technically, the EURUSD appears to have carved out a “head and shoulders” pattern as highlighted below. The “head-and-shoulders” is a reversal pattern which typically marks the end of an upward trend in a particular financial instrument. This ties in beautifully with what we already know about the EURUSD.


The diagram above shows a head-and-shoulders top. The neckline is formed by drawing a line linking up the lows formed after the first shoulder and the subsequent head. Once the second (right hand) shoulder is formed, the neckline becomes a significant area of support. If the price breaks below here then there’s a strong possibility that prices will continue to decline. In other words, the head-and-shoulders pattern signals that the price action has reversed and is now heading downwards after previously trending up before forming the pattern. Now, it’s also important to measure the distance between the neckline and the top of the “head”. This is the pattern height and typically traders then anticipate prices falling by a similar amount below the neckline. If they do then this can be a place to buy back and book profits. However, it could be worth moving a stop down to just above the neckline in the hope of capitalising on an additional move downwards.


We can see that the neckline comes in right on the 23.6% Fibonacci Retracement of the January-September rally. The EURUSD has broken below here (1.1680) suggesting that further downside is possible. As said before, technical analysts typically look for a downside move equal to the distance between the “head” and “neckline”. This is around 400 points (1.2100 minus 1.1700 roughly) suggesting a downside target of 1.1300 (1.1700 minus 400).

Fundamentally, the ECB has said it will extend its Asset Purchase Programme (APP) beyond next month’s cut-off. The bank will continue to purchase bonds, albeit at a rate of €30 billion per month rather than €60 billion. In addition, ECB President Mario Draghi explicitly said that the APP could be extended in size and/or duration in necessary. So this is a dovish outlook from the ECB. At the same time, the Fed has said nothing to reduce the likelihood of a 25 basis point rate hike next month. Consequently, the path of least resistance suggests a weaker euro and a stronger dollar. Of course, this isn’t exactly an earth-shattering secret so must be priced in already. So we now need to keep a close eye on economic data from both the US and Euro zone in case anything should blow either central bank off course.


Spread Co is an execution only service provider. The material on this page is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by Spread Co Ltd or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. This material has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. As a marketing communication it is not subject to any prohibition on dealing ahead of the dissemination of investment research, although Spread Co operates a conflict of interest policy to prevent the risk of material damage to our clients.”


Posted by David Morrison


Category: PM Bulletin

Add a comment Add comment            


© 2018 Spread Co Limited. All Rights Reserved.

Spread Co Limited is a limited liability company registered in England and Wales with its registered office at 22 Bruton Street, London W1J 6QE. Company No. 05614477. Spread Co Limited is authorised and regulated by the Financial Conduct Authority. Register No. 446677.

Spread betting and CFD trading are leveraged products and can result in losses that exceed your deposits. Ensure you understand the risks.

Losses can exceed deposits. Click here to learn more.