The British pound (GBP) has seen downside pressures ease against both the Euro and US Dollar as rising UK inflation data will give policy-makers at the Bank of England time to reflect on their recent policy moves.
- Pound to Euro exchange rate today: 1.1486
- Euro to Pound Sterling exchange rate today: 0.8702
Sterling has recovered by an average of half a cent versus its major counterparts following the release of the most recent set of inflation data from the UK.
July inflation CPI showed a muted impact on headline inflation of the momentous decision to leave the EU.
The inflation rate on an annulaized basis rose by 0.6%, which was above the 0.5% expected and the 0.5% previous.
On a month-on-month basis the inflation rate showed a -0.1% fall, which was in line with estimates, and lower than the 0.2% previously.
Core CPI, which cuts out energy and food, showed a fall of -0.1%, which was below the 1.4% previous and 1.4% forecast.
Factory Gate prices on the other hand rose strongle as the weak pound exerted its pressure more rapidly, by raising the cost of imported components.
PPI input prices rose the most - by 3.3% mom and 4.3% yoy in July, whilst output prices rose 0.3% both mom and yoy - all were above expectations, but especially input prices.
A Possible Failure in the EUR vs GBP Rally Seen
The EUR to GBP rate's chart warns of possible weakness on the horizon for the euro, possibly as a result of thre data out this week.
Commerzbank’s Karen Jones tells clients she sees EUR/GBP potentially turning lower.
In short, this means the up-trend has reached an exhaustion point, and there will now probably be a correction.
This combined with the Elliot Wave count, which shows the pair in the final fifth wave of the move up from the late May lows, is another signal that the up-trend has probably reached a ceiling.
The pair has exceeded its previous 0.8628 highs which means it has achieved the minimum expected attainment for a wave 5, implying that wave may be near an end.
If there was a correction, the lowest it would be expected to fall, would be to the 0.8335 swing lows.
The bearish divergence between price, which has exceeded its July 0.8628 highs and the MACD momentum indicator which has not exceeded momentum at the July highs, is evidence the most recent rally was weak and vulnerable to breakdown.
BUT - Still too Early to Call the Reversal
Ideally, however, it would be preferable to see a reversal sign from price action itself before commiting to a bearish call, marked by say a candlestick reversal pattern, for example, or some other bearish signal, before calling an end to wave 5, as in some cases they can extend a lot higher than expected.
The below image from Nordea's Aurelija Augulyte shows that while some may see an exhaustion in EUR/GBP, others may see the continuation of the uptrend, albeit at a slower pace:
We believe that it remains too early to call a top and in the absence of a bearish turn from price we stick with a bullish forecast of the pair rising up, potentially to its next target, which both Swissquote’s Yann Quenlann and Commerzbank’s Jones agree lies at 0.8815.
Such a move, however, would require a strong bullish drive to emerge, confirmed by a break above 0.8700-15.
In the case of GBP/USD the chart analysis is simpler, as the pair has fallen close to major support at 1.2857, from the S1 monthly pivot.
This is likely to provide a tough obstacle to further downside, and may even supply a level where the exchange rate could rotate and move higher.
There is even a possibility - extrapolating into the future - that the pair is tracing out a double bottom reversal pattern, with the first trough low in July and the second forming now, and a move higher back up to the top of the range at 1.3400 forecast in the immediate future as the pattern completes, however, this is highly speculative.
In the absence of such a reversal in price action itself we must stick with the down-trend, which is currently dominant.
As such a move well below the pivot, would confirm a continuation lower, with a break below the 1.2800 level, confirming a move down to 1.2700 initially.