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DRAGHI: EU recovery remains weak, fragile and uneven

08 August, 2014

By Jameel Ahmad, Chief Market Analyst at FXTM

As expected by most, the European Central Bank (ECB) left monetary policy unchanged yesterday. As Mario Draghi’s press conference commenced, he explained how further economic sanctions on Russia would impact the EU economy. Draghi was honest in his assessment and said the sanctions would impact the EU economy more than others, but the ECB were still in the process of assessing the effects of the sanctions so far.

Draghi appeared fairly relaxed throughout the Q&A, but he managed to get the attention of the market when he said that the EU recovery remains weak, fragile and uneven. Draghi also proclaimed that the “fundamentals for a weaker exchange rate are better now than a few months ago”. The EURUSD concluding trading at 1.3362.

The Bank of England (BoE) also left monetary policy unchanged, with interest rates remaining at a record-low 0.5%. Additionally, the BoE’s stimulus program was also left unchanged at £375bn. This was all very much expected and resulted in the GBPUSD declining marginally. Overall, the Cable lost 20 pips on yesterday’s opening price and concluded trading at 1.6831.

Today, the UK’s latest Trade Balance and Construction Output is announced. Due to the breaking news last night that the United States authorized airstrikes in Iraq, this may result in the UK economic releases encountering a lack of noise in the currency markets.

However in theory, investors should now become attracted to the USD as a safe-haven. Therefore, the GBPUSD should encounter pressure. The 1.6815 support level on the Daily timeframe has appeared quite stubborn this week and a downside break below this level is required to confirm further moves south are in the pipeline. If 1.6815 is penetrated, further support can be found at 1.6790 and 1.6771.

The USDJPY continued to pull back sharply yesterday and declined by around 50 pips, before concluding trading at 102.080. It is unclear whether this is a further reaction to the USDJPY failing to surpass the psychological 103 level, or the JPY strengthening after the breaking news regarding airstrikes being authorized in Iraq.

If the latter, we should expect the USDJPY to continue pulling back today. Support levels are located at 101.858 and 101.600. In the past, the 101.526, 101.424, 101.333 and 101.185 support levels have been regularly visited.

As a result of the dismal Australian employment report, where the Australian unemployment rates unexpectedly jumped to its highest in a decade (6.4%), the AUDUSD continued to decline overnight. The Aussie has fallen by over 100 pips within the last 24 hours, concluding trading at 0.9270.

This unexpected report is likely to continue weighing on investors minds and as a result, have a detrimental impact on the AUDUSD valuation. Upcoming support can be found at 0.9257, 0.9237 and 0.9222.

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