EURGBP may test 2014 low on the back of key data & events this week


Trading Analysis Corner

EURGBP has come back onto our radar after failing repeatedly into the 100-day sma earlier in April and then more recently breaking below its prior low around 0.8230. What’s more, should 0.82 the figure give way, it could lead to a retest of the key 0.8160/70 zone which sees a convergence of the 2014 low, 61.8% retracement of 2012-13 advance & the October 2012 high. This, combined with a few noteworthy economic data/events due out later this week, prompted us to put our proprietary model to the test.  

Backdrop:

These models were built in an effort determine where many of the FX pairs should be trading, thus we continuously monitor currencies which we have deemed to have a stronger degree of explanatory power using our regression analysis (R2), with variables which we see as statistically significant.

Our proprietary model, which takes into account EURGBP’s 1-month 25 delta Risk Reversal, the equity spread between the German DAX & UK FTSE 100 and the 2-year interest rate differential between Germany & United Kingdom. This produces an R2 of 0.8489 since the beginning of April 2013 and implies a “fair value” of 0.8176. Based on current levels this suggests EURGBP is still slightly overvalued and could have a go at the aforementioned 0.8160/70 technical level.

Notable data/events which may influence EURGBP this week:

  • Wednesday – BoE minutes, UK Mar. Public Sector Borrowing, EU Apr. PMI Manufacturing & Services
  • Thursday – German April IFO survey
  • Friday – UK March Retail Sales

Source: Bloomberg, FOREX.com

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