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EURGBP: Expecting further downward movement

16 June, 2014

By Jameel Ahmad, Chief Market Analyst at FXTM
On Thursday evening, Bank of England Governor Mark Carney surprised the financial markets by stating that the BoE could raise interest rates “sooner than the markets expect”. Only a few weeks earlier, Carney had declared that the BoE was in “no hurry to raise interest rates” and this sudden hawkish transition caused the EURGBP to fall to its lowest value since August 2012.
Over the next few days, we witness the release of high risk economic data from both the EU and United Kingdom. Considering the contradiction of fundamentals these two economies find themselves currently involved in, I am looking for this pair to further extend lower in value.
On Monday, the latest EU CPI (inflation data) is released. It is no secret that the EU is currently encountering low inflation and this prompted the European Central Bank to become the first major central bank to introduce negative deposit rates during their June policy meeting. Analysts are expecting EU CPI to be confirmed at an annualised 0.5% last month, confirming why the ECB acted just under a fortnight ago.
On Tuesday morning, the latest UK CPI figures are released. The BoE’s benchmark inflation target to consider an interest rate increase is 2%. Considering the strong economic performances from the UK last month, there is a chance that CPI increased from last month’s 1.8%. In May, the services PMI (main GDP contributor) expanded beyond expectations, with retail sales recording their most impressive performance in over a decade. Any CPI reading above 1.8% will provide the EURGBP with further selling pressure.
On Wednesday morning, the latest BoE minutes are released. Following Carney’s surprise admission last Thursday evening that the BoE may raise interest rates sooner than the markets expect, there is a growing amount of optimism in anticipation of the BoE minutes.
Recently, we have read about a divergence of opinion regarding when the BoE will raise interest rates. Charles Bean, a member of the BoE’s Monetary Policy Committee has stated that the BoE interest rates could settle at 3% around 2017. Following the news that UK unemployment fell to a 5-year low last week, this Wednesday’s BoE minutes could provide us with our strongest hint yet on when the BoE will raise rates.
Overall, Carney’s hawkish statement took most by surprise. The GBP bulls were starting to give up with the BoE governor’s assertions that there was no hurry to raise interest rates. Such a sudden hawkish transition from Carney had not been priced into the markets.
The contradiction in fundamentals for this pair is evident. Carney’s unexpected comments actually enticed this pair to break below a 3-month downward channel on both the H4 and Daily timeframes. Despite the Oscillators indicating that this pair is oversold, the contradiction of fundamentals lead me to expect further downward acceleration over the coming days; 0.7888 and 0.7830 are possible future support levels on the Daily timeframe.
On Thursday, the latest UK retail sales figures are released. After accelerating to a decade-high last month, a collection of respectable sources expect UK retail sales to slow down. This could be when this EURGBP’s selling momentum begins to slow down.
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