FOREX: Draghi states exchange rate important for growth

After watching Draghi’s speech closely, it appears the ECB’s approach to reinvigorating the EU economy remains a weaker exchange rate alongside bank lending. So far, a lower exchange rate has yet to impact PMIs or inflation but consistently weak economic releases have set off alarm bells, particularly in Germany, and it is expected that this will lead to a further decline in the Eurodollar. My forecast is that the ECB will allow the weaker exchange rate until the end of 2014 to improve economic fortunes. The EURUSD appreciated as high as 1.2697 on Thursday before concluding trading at 1.2668.

Despite UK construction activity expanding to a promising 64.2 in September, the GBPUSD unexpectedly declined from 1.6249 to trade as low 1.6112 on Thursday. Although the Construction release was certainly impressive, the emerging development of weakness in the EU economy correlating with a reduced demand in UK manufacturing has weighed on investor sentiment. Bank of England (BoE) Governor Carney has previously expressed that “UK rate rises will be gradual and limited due to global economic headwinds elsewhere” and the Manufacturing PMI missing expectations earlier in the week has provided an insight into how EU economic problems can have a knock-on effect on the UK economy.

As expected, the USDJPY’s failure to reach resistance around 110.270 proved costly with the pair pulling back as low as 108.002 on Thursday. Although the pair is attempting to make a run to 109 at the time of writing, this pullback is not necessarily over yet. There are some indications of demand for the JPY increasing due to the events in Hong Kong continuing, while there is also pressure on the US employment report this afternoon. If the NFP fails to raise expectations that the Fed will transition to a hawkish bias sooner rather than later, the potential is there for the pair to make downside moves to the 108.668, 108.290 and 108.002 support levels this afternoon.

In line with forecasts, the ECB’s failure to weaken the Euro on Thursday led to the USDCHF finding the 0.9512 support level. The pair appears to be making another advance towards 0.96 Friday morning but with the Swiss National Bank (SNB) rumours of currency intervention priced in for the week, whether the pair can reach 0.96 is dependent on the reaction to the US jobs report. If the markets fail to get excited, the pair will likely move towards the 0.9512 support level again.

Risk Warning: There is a high level of risk involved with trading leveraged products such as forex and CFDs. You should not risk more than you can afford to lose, it is possible that you may lose more than your initial investment. You should not trade unless you fully understand the true extent of your exposure to the risk of loss. When trading, you must always take into consideration your level of experience. If the risks involved seem unclear to you, please seek independent financial advice