The EUR/USD and GBP/USD appear set to bounce from last week's correction with financial markets opening on an optimistic note following the release of positive economic surprises in Asia.
Chinese non-manufacturing PMI showed an increase to 56.3 in October from 55.4 the prior month for the highest reading in over a year. The data comes ahead of a Chinese summit later this week in which the country's leaders are expected to announce reforms. Additionally, Australian retail sales were stronger than expected in September and the prior month's print was revised higher.
Analysts at Danske Bank have pointed out that disappointments in emerging markets would be a warning for risk assets considering that economic surprises in the US and euro area have already fallen to neutral.
As such, optimism from the East appears to have halted last week's corrections on the EUR/USD and GBP/USD, which were sparked by the Federal Reserve's October meeting announcement. Despite closing at the weekly lows, both currency pairs have remained firm at the open.
Looking ahead to the week's agenda, there will be three major central bank policy meetings. Craig Erlam, Market Analyst at Alpari UK, says that a pick-up in activity will make a rate cut by the Reserve Bank of Australia unlikely despite more dovish comments. In regards to the European Central Bank (ECB), analysts are increasingly considering a rate cut. Danske Bank expects the ECB to signal a rate cut in December.
"It now appears to be the consensus expectation that the ECB will cut the refi rate. However, only three of the 68 economists surveyed by Bloomberg expect the ECB to deliver already on Thursday, as the consensus view among those looking for a cut is that the ECB will wait until its December meeting," Danske Bank said.
Speculation over an ECB rate cut appears to have surged after last week's lower than expected CPI readings and signs that economic activity has stalled.
No change is expected this week from the Bank of England as market expectations may increasingly come in line with the central bank's 'forward guidance'. Bank members have even suggested that there could be room to lower the unemployment rate threshold.
In terms of technical analysis, Karen Jones of Commerzbank says further losses are anticipated on the EUR/USD and suggests intraday rallies may be an opportunity to reinstate shorts. "EUR/USD has sold off towards the 1.3438/20 four month up channel and 38.2% retracement and we would allow for this to hold the initial test. This represents a key break down point, a close below here will trigger losses to 1.3104, the September low. Intraday rallies should remain capped by 1.3555/1.3605. Further losses are anticipated," she said.
On the other hand, José María Rodríguez, technical analyst for fxmania, believes there is potential for a strong recovery considering that the correction took the EUR/USD exactly to the bottom part of a bullish price channel and also the support marked by the neckline of a double-bottom formation.