EUR/GBP at seven-and-a-half-year low: look out below!
City Index July 16, 2015 7:15 PM
<p>It’s amazing what a new week can bring. At this time last week, EUR/GBP bulls had the upper hand after driving the normally-staid pair up […]</p>
It’s amazing what a new week can bring. At this time last week, EUR/GBP bulls had the upper hand after driving the normally-staid pair up 200 pips from the.7000 level. Now, the bulls are on the run after a 200+ pip bearish route this week, and the European cross recently hit a fresh 7.5-year low down at .6970.
With traders across the globe starved for yield, it’s not surprising that the big move in EUR/GBP has been driven by a big shift in relative interest rate expectations. As my colleague Kathleen Brooks noted earlier today, the European Central Bank’s primary focus will be on recapitalizing Greek banks for the near-term, meaning that the banks ultra-accommodative monetary policy is likely to remain in place for the forseeable future.
By contrast, the Bank of England shocked markets at the beginning of this week by striking a hawkish tone. On Tuesday, BOE Governor Carney expressed his opinion that, “The point at which interest rates may begin to rise is moving closer given the performance of the economy” and noted that “wages are beginning to grow, interest rates are at historically low levels, and so households should begin to manage their finances with the assumption that there should be an upward adjustment in interest rates.”
This sentiment was echoed by outgoing Monetary Policy Committee member Miles, who explained that “The time to start normalisation is soon; that is not something to shrink from.” In a market that had priced out any chance of a BOE rate hike this year, Tuesday’s comments led to a big rally in the pound as traders shifted their rate hike expectations forward.
Technical view: EUR/GBP
As we noted above, EUR/GBP edged down to a new 7.5-year low beneath key psychological support at the .7000 level earlier today. Not surprisingly, the secondary indicators are also painting a bearish picture: the MACD has rolled over and is now trending lower below its signal line and the “0” level, while the RSI indicator continues to put in lower lows and is peeking below previous support near the 40 level.
If the break below .7000 is confirmed by a daily close near current levels, another bout of weakness will be favored heading into next week. Even on a longer-term chart, there is not much in the way of previous support until the January 2007 lows in the .6500-.6600 zone. More immediately, short-term traders should monitor the Fibonacci extensions at .6885 (127.2%) and .6725 (161.8%). As long as the pair remains below last week’s high around .7200, the technical bias will remain to the downside.
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.