BOE’s Super Thursday festivities could set the tone for EUR/GBP next big move

<p>So far, today’s price action has followed the script laid out in the first part of the week: China’s stock market traded lower overnight as […]</p>

So far, today’s price action has followed the script laid out in the first part of the week:

  • China’s stock market traded lower overnight as the PBOC left the CNY’s fix essentially unchanged
  • European and US stocks opened higher, only to see those gains evaporate ahead of the European close
  • Oil is falling once again, leading to weakness in commodity currencies and risk appetite as a whole
  • The US dollar index is rising marginally on the continued global uncertainty

It remains to be seen whether we’ll see a late-day rally to bring US equities back into positive territory (given the extent of this morning’s selloff, it’s going to be tough), but so far, today’s trade has been rather “ho-hum” on the whole.

One currency pair that’s poised for a potentially big move one way or another in the latter half of this month is EUR/GBP. The European pairing has been on a tear lately as traders continue to push back expectations of BOE tightening; now the market is not expecting the central bank to raise interest rates until May 2017 , a big change from the expectations a few months ago, when even the pessimists assumed the Carney and company would raise interest rates in 2016.

With both the Eurozone and UK economy struggling, EUR/GBP traders will closely monitor the relative changes in major economic indicators moving forward, as well as the geopolitical risks on the horizon (cough Brexit? cough).

Technical View

From a technical perspective, EUR/GBP is at a particularly precarious level. The pair tagged a new 11-month high above the .7500 level on Monday, but bulls have failed to confirm the breakout by pushing rates definitively higher. That said, we can’t necessarily call the move a false breakout either as the unit is still consolidating above previous resistance near the .7500 level. The most-watched secondary indicators are turning in a split decision of their own, with the MACD trending higher above its signal line and the “0” level, showing bullish momentum, while the RSI indicator is currently in overbought territory and showing a possible bearish divergence.

While we can’t fault readers for trading EUR/GBP in either direction at this point (as long as they’re using stop losses and good risk management techniques), the most prudent strategy may be to wait for the pair to “pick a direction” before committing too strongly. For instance, if EUR/GBP rallies to close above Monday’s high at .7555, it would tilt the odds in favor of more strength, potentially up toward the 38.2% Fibonacci retracement of the entire 2013-15 drop near .7650, if not higher.

On the other hand, a move back below the .7420 level that marked Monday’s low would indicate that the bears are finally stepping in to defend that key resistance level and could open the door for a dip back toward the middle of the recent range around .7200 or even long-term support near .7000. Of course, tomorrow’s BOE “Super Thursday” festivities could have a meaningful impact on the pair so if the initial move following the central bank’s latest proclamations is maintained, it could set the tone for the next couple of weeks’ worth of trade in EUR/GBP.

EURGBP1-13-2016 2-46-19 PM

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.