It seems that the pound sterling was affected by high speculative activity. There are no other reasons for the ongoing decline. Even the news flow is providing favorable conditions for the currency. Let us find out the main reasons for such a dynamic.
The recent reports unveiled that London remains the financial capital of Europe despite Brexit. The pound sterling has surged, reaching its 2-year high. That is why a downward correction was quite predictable. However, the pace of a decline points to the speculative nature.
At the same time, today, the British currency may jump during the US trade. The fact is that the US will report on its inflation that is expected to advance to 4.7%. In other words, the US inflation is still rapidly rising. However, the US Fed insists on the absence of inflationary risks. The regulator is also sure that the situation will improve in the near future. Notbaly, the expected inflation figures provide a signal that the key interest rate should be raised soon. The US economy is not ready for such changes. The monetary policy tightening will surely slacken the economic recovery.
Meanwhile, the euro is inching down, remaining almost unchanged. Such a situation was caused by concerns about the ECB meeting. It is almost impossible to predict the outcome. On the one hand, the eurozone inflation is significantly lower than in the US and it has almost stopped rising. It means that there are no reasons for concerns, as the monetary policy is likely to remain the same. On the other hand, producer prices point to further inflation growth.
If Christine Lagarde expresses anxiety about the current situation, markets may consider this as a signal to a possible rise in the interest rates. However, the eurozone economy is neither ready for such a decision. If the predictions come true, the euro may slump.
Let us take a look at the trading charts ahead of the publication of the ECB meeting results and US inflation figures.
Yesterday, on the US trade, the euro/dollar pair did not show any significant changes. The speculative activity was of local nature. As a result, the quote returned to the level logged at the beginning of the day.
On the trading chart, we can see an attempt to break the support level of 1.2160. Judging by the price location on the four-hour chart, the support level was tested only by the shadows of the candlestick. Traders are still analyzing the price location concerning the levels of 1.2160 and 1.2200 as this may help them predict a further movement.
At the same time, the pound/dollar pair once again rebounded from the middle line of the channel located at 1.4172. As a result, the volume of long positions dropped. Traders started opening sell positions with the target of 1.4100.
Analyzing the current chart, we can see a first signal of a radical change in the market situation. During the European session, the price broke the lower limit of the range located at 1.4100.
If the pound/dollar pair fixes below 1.4080on the four-hour chart, the volume of short positions may rise, pushing the price to 1.4000. (*)
Otherwise, we will see a false break and the price return to the sideways channel.