EUR/GBP jumps as German investor confidence improves sharply, testing trend

The euro has appreciated against most major currencies today after a closely-watched survey suggested confidence among German investors and analysts has improved unexpectedly sharply this month. The ZEW’s Economic Sentiment for Germany jumped to +11.5 from -3.6 in October, easily beating expectations of +0.5. This is the first time since January that the German ZEW has improved relative to the month before. Confidence has undoubtedly improved following the release of the third quarter GDP figures from the Eurozone and also the promise of more unconventional monetary stimulus – if needed – from the ECB. Although Germany barely grew in the third quarter, some of the other Eurozone countries performed remarkably with Greece’s economy attracting the most attention – this time, for a good reason! Meanwhile investors’ assessment of current conditions for Germany also improved a touch. ZEW's Indicator of Economic Sentiment for the euro zone as a whole increased to +11.0 from +4.1, while the current conditions reading fell by 2.9 points to -59.7. Overall the positives of the report outweighed the negatives and the euro’s bounce was perhaps rightly justified.

Meanwhile the latest inflation figures point to a mixed outlook for prices in the UK. The CPI unexpectedly climbed to 1.3% from 1.2%, but core prices remain unchanged while both PPI input and output prices fell. As a result, the pound has edged slightly higher against some of the majors, but still remains under pressure after the recent dovish remarks from the BoE camp.

In fact, the EUR/GBP is threatening to end its bearish trend, at least in the near-term. At just shy of 0.8000, the currency cross is currently testing a bearish trend that has been in place since the start of August 2013. Depending on what price does here, we could see a sharp move over the next several days. A potential breakout could see the EUR/GBP at least move into the 0.8035/65 key resistance range; as can be seen from the shaded area on the chart, the 200-day moving average (0.8055) meets prior highs there. Therefore, a break above this area is needed to confirm the change in the trend. If we do see that, price could then rally towards the Fibonacci retracement levels of that downward swing from the August 2013 peak: the 38.2% retracement level is at 0.8150 while the 61.8% is at 0.8385. But if the bearish trend line holds, the EUR/GBP could potentially give back the entire gains made in recent days. The near-term support levels to watch are 0.7955 followed by 0.7910 and then 0.7800.