EUR/GBP falls as stress test results overshadowed by German business survey

In its downed trajectory, the EUR/GBP has retraced somewhat deeper than I had envisaged in my previous report. Although expectations about the first Bank of England rate hike have been pushed out a little bit, the UK central bank is still expected to tighten its policy well before the ECB does. Recent economic data out of the UK are pointing towards a mixed outlook for inflation and growth. Consumer prices have eased sharply and wage growth has remained weak. But the overall economic output is still relatively strong – as we found out on Friday, GDP grew by a solid 0.7% in the third quarter, matching the consensus forecasts. Today, the CBI's realized sales index for October came in a touch better than expected, printing 31 vs. 29. Meanwhile in the Eurozone, inflationary pressures are non-existent and growth is feeble. That is why we have an uber-dove ECB. Against this fundamental backdrop, I remain bearish on the EUR/GBP.

Though the results of the latest bank stress tests were not as bad as had been feared, which led to an initial rally in European markets this morning, financial stocks have already pared their gains and the major stock indices have now turned red. The EUR/USD has also turned negative on the session, and a revisit of 1.20 for the pair is still not out of the question. The cross meanwhile has broken last week’s low and further losses could be on the way soon, particularly if the Eurozone inflation data later this week disappoints expectations. The euro has certainly not been helped by today’s main data from Europe: the German Ifo Business Climate. This came in at 103.2, compared to expectations of 104.6 and the previous reading of 104.7.

Technical view

As the daily chart of the EUR/GBP shows in figure 1, the cross has been moving lower inside a downward-sloping channel since the summer of last year. At the time of this writing, it is testing the 61.8% Fibonacci retracement level of the last upswing, around 0.7870. So, there is a possibility for a bounce here. But if the EUR/GBP makes a decisive move below this level, the next stop could well be the key support at 0.7770. This level corresponds to the neckline of a long-term descending triangle continuation pattern which can be seen in figure 2 on the weekly chart. The pattern clearly shows that the demand for the EUR/GBP has been weakening. Thus a potential break below there could possibly send price towards the psychological 0.7500 mark at some point in the near future. Meanwhile a break above resistance at 0.8065 would signal the end of the short-term bearish outlook.