EUR/GBP fell sharply following Coeure's comments on ECB QE

EUR/GBP

• The dollar traded higher against almost all of its G10 peers during the European morning Tuesday, ranging from +0.15% vs NZD to +0.90% vs EUR. The greenback was stable only against JPY.

• EUR plunged after comments by the ECB Executive Board member Benoit Coeure suggested that the ECB had ways to ease policy further even now. He revealed that the Bank will “frontload” its QE program in May and June to avoid disrupting the market during the summer months, when many Europeans take vacation and liquidity is lower. Bund yields fell 5 bps on the news, widening the gap with Treasuries. Later in the day, German ZEW survey for May added to the recent weak data from the country with both indices falling below market expectations. The current conditions index declined after six monthly gains, while the expectations index deteriorated further, possibly reflecting concerns over Greece. EUR/USD fell below our support level of 1.1200 on these developments. If the US housing data later in the day shows some improvement in the housing market, as expected, we could see the rate challenging our next support of 1.1130, in our view.

• The UK slipped into deflation in April as the nation’s headline CPI rate fell to -0.1% yoy from 0.0% yoy previously, in line with BoE expectations of negative rate in the not-too-distant future. The core inflation rate slowed to +0.8% yoy from +1.0% yoy in the preceding month, the lowest core rate since 2001. Expectations were for the headline and core rates to remain unchanged. GBP/USD tumbled on the news as the decline in the core rate suggests low inflation is not merely a matter of low oil prices and prices may not rise even when the effects of low oil prices fade from the data. Anything that increases the risk that the BoE might not reach its inflation target pushes back expectations of a rate hike and leaves GBP vulnerable, at least temporarily.

• EUR/GBP fell sharply following Coeure’s comments, hit support around 0.7150 (S2), and recovered after the disappointing UK CPI data for April. At midday in Europe, the rate is trading slightly above the 0.7195 (S1) level. Although the rebound may continue for a while, perhaps for a test at 0.7250 (R1), I would take the sidelines as far as the short-term picture is concerned. The main reason is because I don’t see a clear trending structure on the 4-hour chart. What is more, the RSI, although below 50, has turned up, but the MACD stands below its zero line and points down. These mixed momentum signs support my flat stance. Switching to the daily chart, the 7th – 13th of May decline brought into question the completion of a failure swing bottom pattern. Therefore, I prefer to maintain a neutral stance with regards to the overall path as well.

• Support: 0.7195 (S1), 0.7150 (S2), 0.7115 (S3)

• Resistance: 0.7250 (R1), 0.7285 (R2), 0.7300 (R3)