Morning Report: EURGBP Pausing At Lows Ahead Of ECB

Suffering from a combination of increased BoE hawkishness and increased ECB dovishness,  EURGBP is currently sitting over 600 pips off YTD highs having printed just two positive months in 9.

This double-barreled fundamental situation has now taken price into a 2 year double bottom, currently stalling at the .7757 2012 low. This level also coincides with the bottom of 14 month bearish channel that price has been moving within and the 61.8% fib retracement from the 2006 lows so we could see some short term technical support at this level.

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Clues as to where we go in the short term abound, with significant data releases this week. Economic data released yesterday saw Eurozone inflation dipped lower, with the headline estimate dropping to 0.3% y/y and core falling to 0.7% y/y, well below the 0.9%y/y estimate. Today saw worrying news that German manufacturing has hit a wall registering it’s first sub-50 score since mid 2013, dropping to 49.9 in September.

The ECB meets Thursday and the combination of these inflation readings and a challenging growth outlook, complicated by building global unrest, suggest that the outlook for Europe is deteriorating further. In contrast, figures released yesterday showed stronger than expected UK final Q2 GDP, which rose 0.9% q/q and could have spurred a break through the lows for EURGBP had further UK data not come in weaker with soft housing data and a wider current account deficit

The next move in the pair is strongly dependent on what we hear from Mario Draghi on Thursday and it should it  prove that the 4% drop in EUR since the September 4th meeting has worked as an offset enough to prevent an increased sense of urgency out of the ECB we should see some consolidation at these levels.

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Ultimately with the European picture still mixed and increased hawkishness out of BoE’s Carney, who last week stated that “With many of the conditions for the economy to normalise now met, the point at which interest rates also begin to normalise is getting closer”, I expect any retracement in the pair to yield strong selling opportunities, especially if we see any retest of the bearish channel highs and 200&150 DMAs which have capped price during its descent.

However, I will also be monitoring price action upon a retest of the .7898 lows for signs of any retracement starting to weaken.

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