Inflation expected to fall below 1% in the UK

Euro Research Report

Dovish inflation report puts pressure on the Pound

Inflation expected to fall below 1% in the UK

ECB chief strikes dovish tone increasing the odds of QE

Sterling Euro (GBPEUR) FX Technical Analysis

After edging towards the two year highs, a raft of poor data sent the Pound tumbling . Sterling lost 3 cents against the Euro within three days, the catalyst for the fall was the Bank of England inflation report. Governor Carney slashed growth and inflation forecasts in the near term citing impact of lower food, energy and import prices have weighed on consumer prices. Even going as far as to say that inflation is likely to fall temporarily below 1% at some point over the next six months before rising gradually back to the target of 2%. The benign inflation backdrop has forced analysts to push back any expectation of a rate hike from February 2015 to much later in the year. Data releases have been somewhat mixed as consumer confidence has picked up which has been reflected in the rise in retail sales figures, this upsurge was the biggest rise in six months. Service sector PMI data , however , was disappointing in October coming in at 56.2 , a 17 month low , much weaker than even the gloomiest forecast. As the sector accounts for above 75% of the economy this is a cause for some concern. Despite several clouds over the UK economy, the Bank of England’s team of interest rate setters is determined to deliver an interest rate hike as their next change in policy and the timing of the next move will be the main driver of the Pound for the foreseeable future.

Over in the Eurozone the economy expanded last quarter at a sluggish pace of .8% annually, underscoring concerns that the region is stuck in a rut of declining investment and high unemployment. Figures showed how entrenched the problem of low inflation has become as consumer prices were just 0.4% higher than in October 2013. Whilst manufacturing and services sector slowed to a 16-month low in November. There are glimmers of hope sprinkled through the gloomy data, as the euro zone's two largest economies returned to growth in the third quarter of the year. Germanys GDP rose 0.1% in the three months through September while France's GDP number surprised on the upside posting a 0.3% growth in the given period, the best reading in more than a year. Business confidence also appears to be on the mend. It would seem that Eurozone recovery is gaining a slight foot hold but is going to be a very slow fragile recovery, which can’t be solved in one quarter, there are long-term problems. The ECB president Draghi has once again this month kept the door open to QE, stating that the ECB is willing to take additional easing steps if the rocky and fragile recovery starts losing ground. Mr Draghi has been more dovish than usual by saying that purchases of government debt would help increase prices for riskier assets thereby "free up capital resources for additional lending". He also said that the ECB may act as soon as early next year in order to bring inflation back to target without delay. It seems clear that European policy makers are paving the way for some form of QE and that this could come sooner rather than later. Unless prices pick up it is difficult to see the Euro maintaining any significant rallies. Today's inflation data will be very closely watched.

For EUR Buyers

In the short term the trend line at 1.2650 looks likely to cap the market. It's been tested a couple of times over the last week and not looked like breaking. If you have a near term requirement perhaps you should reduce your exposure around here. A break above the 13 month high 1.2874 would suggest a quick move higher above 1.3000. A triple bottom has formed at 1.2430/50 and this level is now crucial. Until that level breaks I think that Gbp/Eur should still trend higher. Therefore any protection should be left below here.

For EUR Sellers

In the short term it is hard to see the rate making much headway below 1.2450 due to the triple bottom which has now been formed. That really does look like a decent base. We may consolidate for the time being but a move towards 1.2874 looks more likely now we have bounced. If you can affiord to wait I wiudl suggest leaving a stop loss above 1.2650 trend line resistance