With ECB members on the wires this week trying to reduce fragmentation in the Eurozone, as well as the UK CPI, EUR/GBP could be volatile this week.
The ECB held an emergency meeting last week to discuss what the central bank should do to prevent fragmentation between core eurozone countries and peripheral countries. With Eurozone inflation at 8.1% YoY, the ECB pre-committed to a 25bp hike at the July meeting, with some ECB members raising the possibility of a 25bp hike. 50 bp. However, this opens up the possibility that interest rates in some countries (the peripherals, like Italy and Spain) will rise faster than interest rates in other countries (the core, like Germany) . The outcome of the extraordinary meeting was twofold: 1) That the ECB would apply flexibility in the reinvestment of repayments on the PEPP portfolio. 2) Mandate an ecosystem committee to design a new anti-fragmentation instrument. This week, the members of the ECB will be out in force, with no less than 10 MEPs taking the floor. They will probably try to lower inflation expectations. Last week, ECB President Christine Lagarde told ECB ministers that the ECB planned to limit bond spreads. In addition, they will also try to reduce concerns about rising interest rates. ECB member Lane has previously said that larger additional rate increases in September do not represent a red-alert assessment for inflation. The ECB will not meet again before July 21stat that time, he will already have the June inflation reading in hand.
The BOE met last week and raised interest rates by 25 basis points. Committee members are concerned about the effects that higher interest rates will have on household incomes. BOE officials said they see inflation climbing to 11% in October and 9% in recent months. This week, markets will see May inflation data. The print headline is expected to rise from 9% YoY to 9.1% YoY, although the base rate is expected to fall from 6.2% YoY to 6% YoY. Despite the expected fall in the base rate, this is only a small deviation in the overall grand pattern of high inflation data. May retail sales are also expected to come out this week. Expectations are for an overall reading of -0.9% MoM versus April’s reading of +1.4%. Non-fuel retail sales are expected to be -1% MoM vs. +1.4% MoM in April. Will this week’s data continue to follow the recent worse than expected data released last week (including manufacturing production, industrial production and number of claimants)? Note that the MPC has mentioned that it will act forcefully if necessary to stem inflation. The BOE pill recently said that if price pressures set in, it could trigger more aggressive rate hikes. Look at inflation readings this week!
EUR/GBP was in a long-term descending channel from mid-April 2021 until May 5e, when the pair aggressively broke through the upper trendline of the channel near 0.8480. The pair continued higher to 0.8618 on June 14e and 15e, only to pull back and retest the upper trendline. Support held and EUR/GBP hit a new short-term high at 0.8719, testing the April 2021 highs!
Source: Tradingview, Pierre X
Over a 240-minute period, EUR/GBP has been trending higher since April 14e. After hitting the recent high last week, the pair pulled back and held the ascending trend line. The first resistance is at June 15e highs at 0.8721. This area is also the 50% retracement level from the December 11 highs.e2020 March 7 lowse. Above there, horizontal resistance intersects the February 2021 highs near 0.8797 and then the 61.8% Fibonacci retracement level from the previously mentioned time frame near 0.8837. First support is at the April 14 ascending trendlinee lower near 0.8530. Below that, support lies at the upper falling trendline of the longer-term channel near 0.8470 and then May 17th.e lower at 0.8393.
Source: Tradingview, Pierre X
With ECB members on the wires this week trying to reduce fragmentation in the Eurozone, as well as the UK CPI, EUR/GBP could be volatile this week. The UK will also release retail sales. If the data continues to be worse than expected, watch EUR/GBP for a possible break above recent highs!
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