The euro rose over 0.6% against the pound on Tuesday after one of the Bank of England's resident hawks, martin Weale called for more stimulus following recent weak data
The pound weakened on Tuesday after a Bank of England (BOE) rate-setter who is known for normally being optimistic, surprised markets by turning 180 degrees and adopting an unequivocal pro-stimulus stance instead.
BOE's Martin Weale said he now favoured the introduction of immediate monetary policy stimulus following the depressing economic indicators so far released for July, which includes the Manufacturing and Services Flash PMI's (which both fell into contraction territory) and the CBI Industrial Trends survey.
With even the less stimulus-favouring members of the BOE now supporting a dose of 'money printing' the announcement of a stimulus banquet at the August 4 BOE rate meeting now appears a 'done deal'.
Commenting on Weale's change of stance, ING bank's Viraj Patel said:
"In an interview with the FT, MPC member Martin Weale has significantly altered his policy stance in light of last week’s dismal PMI data (and collapse in business expectations) and now sees immediate monetary easing as necessary for the UK economy. This supports our view that the BoE will deliver a sizeable package of stimulus measures at next week’s MPC meeting (4th Aug)."
Technical Outlook: pulling-back in strong short-term up-trend
The EUR/GBP pair is pulling-back lower but remains within its broader uptrend.
It has started trading in narrow range within that pull-back - in a triangle pattern.
This is probably an Elliot fourth wave, as suggetsed by Commerzbank's market technician Karen Jones.
Jones sees the wave four correction continuing lower and then once complete, rotating and resuming the up-trend:
"The Elliot wave count on the daily is pointing to a 0.8229/0.8110 retarcement prior to recovery. Intraday rallies are likely to struggle at 0.8445/80 and we will remain downside corrective while capped here."
"Beyond a small correction the market remains on course for the 0.8815 February 2013 peak." She concludes.
Elliot waves are a type of market cycle and contain five parts, or waves.
Waves' one, three and five are impulsive, which means they are in the direction of the dominant trend; waves two and four are corrective, however.
The current pull-back from the 0.8627 highs is probably a wave four.
It has also formed a triangle pattern, which is characteristic of the often complex nature of wave fours
The correction is most likely not yet finished as the MACD on a special 5, 31 setting which makes it an 'Elliot Wave Oscillator' has not moved below the zero line yet, and that is normally a sign wave four has completed.
It is therefore more likely that the triangle will break to the downside rather than the upside.
Such a breakout lower, would probably be confirmed by a move below 0.8250, with a target at 0.8150.
Alternatively, there is a less chance that the exchange rate will breakout and rise from the triangle, however, a move above the 0.8472 triangle highs would probably confirm an extension higher to at least the 0.8600 level.
Strong Data to Keep Euro Supported
The IFO business sentiment survey measures how German business people feel about the current situation and the outlook for the medium term (roughly 6 months).
The IFO for July, released on Monday, showed sentiment souring slightly after the referendum returned a vote to leave the EU.
As a consequence, the gauge fell from 108.7 to 108.3, but this was not as low as the 107.5 expected.
The euro actually rose versus the dollar after the result as it provided further evidence on top of the robust Manufacturing and Services PMI’s on Friday, that the Eurozone economy is weathering the fallout from Brexit surprisingly well.
If data now continues to show that Brexit does not pose the risk everyone feared it would, the euro could rise as expectations of the ECB increasing stimulus in September begin to diminish.
The ECB made it clear at their meeting on Thursday, that they would act on incoming data showing how well the economy was doing - a ‘wait-and-see’ stance as the media is fond of characterising it. Data therefore will carry a premium until then.
Of major significance, in the week ahead, therefore, will be July CPI on Friday, as this will have a major impact on ECB policy decision-making.
A surprise to the upside combined with the recent relatively robust data for July would diminish the possibility of more stimulus from the ECB and support the euro, a fall in inflation, however, would put ECB tools back on the table and as a consequence weaken the euro.
The EUR/USD chart still signalling more downside, and given the Federal Reserve have their rate meeting on Wednesday there is a strong possibility of dollar could strengthen if the Fed starts to talk up the outlook for the economy, bring the possibility of a rate rise back into the picture.
Technically, the pair has continued declining after breaking below the lower border-line of a multi-month rising channel.
It is expected to continue selling off until it has reached the target for the channel breakout, at around 1.0750, which is calculated from extrapolating the height of the channel down, from the point of the break.
A strong support level at 1.0861, however, provides an interim target, where the exchange rate will almost certainly pause or possibly even bounce.
The MACD momentum indicator in the bottom pane has crossed its signal line, supporting the bearish outlook.
A break below the 1.0909 Brexit spike lows would provide added confirmation of further downside for the pair.
Looking at the daily chart now and we see the long post-Brexit down-trend preceding a correction which has formed into a triangle.
The daily chart produces an overwhelmingly sense that the correction is incomplete and there remains a final leg to go higher, since most corrections have three parts, and this one still looks like it only has two.
As such the daily makes us prefer a bullish scenario over bearish, with a break above 1.21 leading to a move up to 1.22, and then possibly 1.23 etc.
On the four hour chart the pound to euro pair has formed a clear triangle pattern.
The triangle is now complete having unwound the minimum five waves (a,b,c,d and e), and is therefore likely to breakout soon.
There is a slightly higher probability of a bullish breakout given the daily chart favours another leg higher.
If the exchange rate moves above 1.2100 that will probably confirm an upside break and lead to the pair extending its rally to 1.2200.
Alternatively, a move below 1.1850 level would confirm a downside break with an initial target at 1.1800, followed by 1.1700 and 1.1600.
UK Business Optimism Plummets
Business optimism has deteriorated at its fastest pace since January 2009 and investment intentions have been scaled back following the Brexit vote, the CBI has said.
The business group's Industrial Trends Survey revealed that optimism had fallen sharply in the wake of the EU referendum result, while expectations that total new orders will rise are at their lowest level since January 2012.
It found that 52% of firms were less optimistic about the general business situation compared to three months ago, while 5% of businesses were more optimistic, leaving a balance of minus 47%.
The news will come as a concern for those betting on a stronger GBP as the data will likely elicit a strong response from the Bank of England at their August policy meeting.
However, it could also be argued that while confidence would have taken a significant knock in the immediate aftermath of Brexit, it could quickly bounce back.
Indeed, the global economy, especially that of Europe, has weathered Brexit well and this could prop up UK confidence over coming months.