EURGBP SHORT Trend Momentum Bearish Continues
Updated
EUR/GBP BEARISH CONTINUATION
Euro zone fundamentals weaken: Technical recession confirmed, inflation data improving which helps build a case for a more dovish ECB to come
Markets anticipate another 100-bps worth of tightening from the BoE this year as inflation is way too high still at 8.7%
EU FUNDAMENTALS ARE LIKELY TO EMBOLDEN ECB DOVES
Downward revisions to both the Q4 2022 and Q1 GDP quarterly growth figures suggests the European economy is taking strain as financial conditions are set to tighten even further next week. With the euro zone in a technical recession and seeing core inflation head lower, bears within the ECB’s ranks may soon garner support from more hawkish governing council members when it relates to the path of future monetary policy. Furthermore, disappointing Chinese data has revealed that the reopening of its economy has not gone to plan – which has negative trade implications for Germany, Europe’s biggest economy.
On the other hand, the bank of England still sees inflation at 8.7% which is way too high but the good news is that they forecast the figure to drop quickly for the rest of 2023. Nevertheless. markets still anticipate as much as 100-basis points into year end which would place the bank rate at levels anticipated for the Fed at 5.5%. Such expectations are likely to support the pound in the interim.
EUR/GBP TECHNICALS
EUR/GBP appears to be consolidating within a pennant formation which usually hints at a bearish continuation provided it is preceded by a downtrend. The death cross (blue line crossing below the red line) suggests a bias towards bearish moves. Should prices break below the pennant or even consolidate before regaining downside momentum, 0.8565 is the immediate level to watch, followed by 0.8515 and 0.8500 flat. The bearish bias would need to be reevaluated should prices breach 0.8650 and continue to produce a daily candle close above the zone around 0.8725 (orange zone). An additional risk to this setup is the nearness of the RSI to oversold territory. Therefore, a period of consolidation may be welcomed in this case.
Euro zone fundamentals weaken: Technical recession confirmed, inflation data improving which helps build a case for a more dovish ECB to come
Markets anticipate another 100-bps worth of tightening from the BoE this year as inflation is way too high still at 8.7%
EU FUNDAMENTALS ARE LIKELY TO EMBOLDEN ECB DOVES
Downward revisions to both the Q4 2022 and Q1 GDP quarterly growth figures suggests the European economy is taking strain as financial conditions are set to tighten even further next week. With the euro zone in a technical recession and seeing core inflation head lower, bears within the ECB’s ranks may soon garner support from more hawkish governing council members when it relates to the path of future monetary policy. Furthermore, disappointing Chinese data has revealed that the reopening of its economy has not gone to plan – which has negative trade implications for Germany, Europe’s biggest economy.
On the other hand, the bank of England still sees inflation at 8.7% which is way too high but the good news is that they forecast the figure to drop quickly for the rest of 2023. Nevertheless. markets still anticipate as much as 100-basis points into year end which would place the bank rate at levels anticipated for the Fed at 5.5%. Such expectations are likely to support the pound in the interim.
EUR/GBP TECHNICALS
EUR/GBP appears to be consolidating within a pennant formation which usually hints at a bearish continuation provided it is preceded by a downtrend. The death cross (blue line crossing below the red line) suggests a bias towards bearish moves. Should prices break below the pennant or even consolidate before regaining downside momentum, 0.8565 is the immediate level to watch, followed by 0.8515 and 0.8500 flat. The bearish bias would need to be reevaluated should prices breach 0.8650 and continue to produce a daily candle close above the zone around 0.8725 (orange zone). An additional risk to this setup is the nearness of the RSI to oversold territory. Therefore, a period of consolidation may be welcomed in this case.
Note
Gold is Being Pulled Between a Hawkish Fed and New Geopolitical ConcernsUS Housing Surprises, Fed Pauses but Remains Hawkish
Last week, US economic data revealed a much stronger than expected housing market, with the NAHB Housing Market Index surpassing expectations to hit its highest level since July of last year. New building permits also beat market expectations, and new housing starts surged to their highest level since May 2022.
Last month, we reviewed the three possibilities of a Federal Reserve pivoting to rate cuts, continuing to hike, or pausing. The June FOMC meeting delivered our most likely scenario of a pause, which we presented as one of the better cases for gold, at least in the short term.
However, what markets received from the June FOMC meeting was a hawkish pause, in which no action was taken, while Chair Powell renewed his hawkish rhetoric, underlining his commitment to the task of bringing down inflation.
In a busy week for FOMC speakers, markets had the opportunity to digest comments from a total of six FOMC members. Jerome Powell also made his semi-annual trip to Capitol Hill, testifying before the House Financial Services Committee, and Senate Banking Committee, where he all-but confirmed that more rate hikes are in store and stated that “we don’t see rate cuts any time soon.”
Gold’s Reaction
The result of this pull between the resilience of the US economy plus a hawkish Fed on the one hand, and growing geopolitical uncertainty on the other, has resulted in muted price action despite the overall bearish trend.
We’re seeing this among investors at HYCM as well, for whom gold is one of the most popular assets this year. Positioning suggests current price action could be a period of short-term profit-taking within a longer-term bullish view.
We can see this reflected in gold’s chart. Between June 20 and 22, which saw the release of US housing data and FOMC speeches, gold prices declined by almost 2.4%.
Note
Trade open active bearish
Note
trade is open
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