Good morning

Central Banks (CB) take centre stage today with the BOE and ECB both in all likelihood expected to leave rates unchanged. The ECB has a scheduled conference following the announcement at 12H45 (GMT) though we are not expecting any major fireworks. Truth be told after Italy officially entered its THIRD in SIX years there is very little that the ECB can do but stay on its present course. If anything they should be “happy” to see the USD making headlines as this in effect helps make European goods more attractive. As I stated in my commentary yesterday, the best thing the ECB could do is allow the EUR to weaken vis-a-vis the USD to allow European Corporates to convert their foreign earnings at more favourable rates (remember they are BUYING EUR). So, going back to what I said above, Gov. Draghi will make some comment about Italy (and France) and confirm that for now things must follow their present course of action and hope things pick up going into Q3-4.

GBP/USD remains glued to the 1.68 handle (1.6840 as I write this) from the multi-year high of 1.7190 that was hit just three weeks ago. After that high was established, which was just short of its original 1.7250 upside target, the currency pair followed the USD and reversed course to make a sharp decline (-2.05% decline). That decline broke down swiftly below the key 1.7000 support level and the 50-day moving average in late July. GBP/USD is currently trading  between the 50 and 200-day moving averages, which are both still pointing up and indicating a solid bullish trend (for the time being). At the moment, the recent drop can still be considered simply a pullback within the context of a strong, year-long uptrend. The  pullback could turn into something more substantial if GBP/USD is able to break below major support around 1.6700. This level is not only a key support level, it is also where the 200-day moving average currently resides, a key 50% Fibonacci retracement level & a major psychological level.

The escalation of possible conflict in Ukraine that started yesterday afternoon has gathered momentum, causing investor sentiment to continue its collapse as market participants  flight into safe-haven assets this morning.  Yesterday’s warning from Poland’s foreign minister that the risk of Russia invading Ukraine has increased as Russia amasses military troops in battle formation along the Ukrainian border, in addition to the reports Putin was readying counter-sanctions against the West, culled risk appetite and sent global equities lower, with the resulting movement out of high-yielding assets.  Equity markets globally have not been spared, with the majors all in the red.  Not helping matters in the European Union was the fact that manufacturing orders decline 3.2% compared to May, which had also seen a 1.6% drop from the month prior.  The disappointing industrial order number is likely a result of a pause in orders as the conflict in Ukraine festers, but also confirms the Bundesbank’s caution that GDP growth in Germany stalled during Q2.

While I stated above that FX traders are waiting for the rate announcements later today, it is really the Ukraine issue that is now taking centre stage. Any escalation in that conflict will see further flight to safety, further deterioration in stocks and ultimately a delay in the recovery of that region. No doubt the geopolitical landscape has and is changing. Russia for reasons I cannot fathom are isolating themselves more and more when in fact they should be forging closer relationships with the West. Ukraine doesn’t offer them anything they don’t have already, so as far as I am concerned this is simply the Russians trying to show the world they can’t be pushed around. I thought the cold war was behind us.

I am still of the opinion that FX markets will continue in the current trend. EUR/USD lower targeting 1.3000, GBP/USD higher targeting 1.7000, EUR/GBP lower targeting 0.7900 in the greater scheme of things.

Have a good day and good luck