EURGBP is heavily dependent on the BoE

A potential for a bullish move may be forming in the EURGBP.

The chart shows the formation of a falling wedge (yellow), although there could easily be an argument made that it is a descending triangle; both can result in a break of structure to the upside.

Also note, a strong support line (green) which has been in place since summer of 2015.

Moreover, there is a very interesting support resistance zone highlighted by the grey box which the price has just entered.

Terminal rate expectations have reduced slightly but markets have still priced in 6.25% rate so any deviation from this will make or break the gbp currency. A slowdown in china with a contraction in Germany paints a gloomy economic picture for the euro but the picture for the pound is not exactly rosey with at increase in unemployment, sticky inflation figures, potential mortgage woes and stubbornly high wage inflation. This means that the boe have some extremely difficult, and politically unpalatable, decisions to make at the next meeting. Personally, I am torn because wage inflation is a big concern to me. The bank will look for a cooling in this area before making any fundamental changes to its current plan. Obviously rate rises take time to filter through the economy so I personally think they should perhaps slow the pace of increase but this will be very data dependant between now and September.

All of theses points converge on the same price point. …a perfect storm for a bounce, or continued strength for the pound?

I feel like a test of 0.8450 - 0.8500 is highly probable with upper limits of the pair being set between 0.8660 - 0.8700

Ultimately I think the pound may be supported by fundamentals in the short term, but technically we could very easily see a bounce in price. It all hangs on the boe’s ability to control inflation.

Happy trading!

Comment:

I feel that the underlying fundamentals, which have sustained the pound year to date, may now be changing. The data suggests that current interest rates are finally having an impact on the economy with a reduction in house prices and mortgage applications accompanied by a contraction in both manufacturing production and orders.

I still believe the BoE is the driving force behind any significant moves in this pair. But the argument for a sterling pause could be offered more credibility by the recent economic data. I still believe a rate rise this month is far more probable but it seems that terminal rate expectations are beginning to more accurately reflect reality which could easily weaken the pound.

I will be looking to buy this pair on a test of 0.8450-0.8495.

Comment:

Largarde’s cautionary pessimism regarding the eurozone’s economic outlook is certainly weighing heavy on the euro. This has been reinforced by todays disappointing PMI data whilst the UKs counterpart surprisingly exceeded expectations. That being said, both central banks have a tough call to make this month but with terminal rate expectations reduced to 5.7% they still exceed that of the EU, who’s bond rates dropped following unemployment rises in the USA.

Technically, the chart shows a potential reversal pattern printed on the 4hr (white circle) so I will once again be looking for cautions longs around the 0.8495 area (white box).

Comment:

With resistance coming up around the previous highs of 8752 and the question around the BoE and its prolonged use of higher rates I think it’s time I get out of this trade.

Trade 1 - 8547 closed at 8747
Trade 2 - 8525 closed at 8747

Total profit 422 pips