EUR/GBP could drop as UK inflation accelerates; French election looming

<p>Earlier, data from the ONS showed consumer price inflation in the UK rose to its strongest level in nearly three-and-a-half years to 2.3%. The pound’s […]</p>

Earlier, data from the ONS showed consumer price inflation in the UK rose to its strongest level in nearly three-and-a-half years to 2.3%. The pound’s reaction was swift. The GBP/USD jumped to 1.2470 while the EUR/GBP slumped to 0.8655. The GBP has since eased back a little but remain near the day’s highs, which suggest more gains are likely.

Headline Consumer Price Index (CPI) measure of inflation printed 2.3% year-over-year in February, up sharply from 1.8% in January and surpassing expectations for a 2.1% print. Core CPI hit 2.0%, while the retail price index (RPI) jumped to 3.2%. Other measures of inflation were mixed. Overall, though, the data was very strong.

“We shouldn’t focus on one data point” said the Bank of England Governor Mark Carney in reaction to today’s surprisingly strong UK inflation figures for the month of February.  Despite Carney’s warning, the market will force the BoE’s hand and demand a rate rise if incoming inflation data continues to remain strong.

With the UK about to start the formal process of exiting the EU, uncertainty surrounding the future of the UK is diminishing somewhat, albeit from a very high level. And with the pound spending several months around 1.20-1.25 against the US dollar, without falling further, one could argue that most of the bad news may already be baked in the price. So, the pound may be able to regain its poise. But with the US dollar remaining fundamentally strong due to a hawkish central bank, even if the greenback has fallen sharply in the past week and half, the pound’s strength may become more apparent against, for example, the euro. With French elections just a month away, rising political risks may undermine confidence in the euro, even if inflation in the single currency bloc has also started to rise. Thus the EUR/GBP may ease further in the coming months, and could potentially drop significantly if anti-establishment right wing National Front party wins the election.

From a technical perspective, the EUR/GBP may be in the process of forming a complex Head and Shoulders reversal formation. It has now failed twice to break the key resistance zone above the 0.8780 area, the second attempt resulting in a lower high. So it could be forming the right shoulder here. But the cross still remains well above the neckline and key support area of 0.8300-8340 and also above the still-rising 200-day moving average (0.8550/5), which objectively tells us that the long-term trend is bullish. However will it now head decisively lower? To have any chance of doing that, it will first need to break below short-term support levels at 0.8645 and 0.8590, levels which were formerly resistance.

17.03.21 EURGBP chart

Build your confidence risk free
Join our live webinars for the latest analysis and trading ideas. Register now

StoneX Financial Ltd (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.