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Fade the EUR/GBP Bounce

The EUR/GBP ended last week in a short-term consolidation and started this week with a bearish breakout as we can see in the 1H chart. Today, it got a little bounce after the UK CPI data.

EUR/GBP 1H Chart 4/14


(click to enlarge)


UK CPI y/y (March): 0.0%
Forecast: 0.0%
Previous: 0.0%


(source: forexfactory.com)

The decline of inflation in 2014 has shifted the BoE's stance from slightly hawkish to slightly dovish and has pressured the pound against the USD. However, the Euro is already dovish and has implemented quantitative easing. The euro is the weaker of the two currencies at the moment, and even though inflation remained at 0.0% in March, this dynamic should remain between the euro and pound. 

At least, there was no further dip in the annual inflation rate as we have seen for 4 months in a row. The market's initial reaction to the inflation data has been bearish for the GBP vs. EUR. The EUR/GBP rebounded as we can see in the 1H chart. From a technical perspective this is a pullback after a breakout which will test the determination of bears in the market. 

If EUR/GBP is going to confirm the bearish breakout, it will put pressure back towards the 0.7180 level with risk of falling further. In this scenario, the current pullback should find resistance around where it is now, at the previous support. We can give it some elbow space during the 4/14 session, maybe up to 0.7240. However, if it starts to climb back above 0.7250, we are likely going to see some consolidation in the next few sessions.

EUR/GBP 4H Chart 4/14
(click to enlarge)

In the 4H chart, we can see that the early-week break down was also a breakdown of a medium-term range roughly between 0.7223 and 0.7383. The downside risk from this breakout will first be the 0.7150-0.7175 support/resistance area, then the 0.70 psychological level up to the 0.7014 low on the year.

Remember we mentioned that based on the 1H chart, a break above 0.7240 would signal further consolidation in the near to short-term. Well, it would signal a pullback in the 4H chart to test the broken top (some will call this a double top). In this scenario, if price can hold under 0.73, the short to medium-term outlook will remain bearish.