Will the Recession Kill the EURGBP or Will the Olympics Save It

By FX Empire Analyst - Barry Norman
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Yesterday, two important factors laid the groundwork for a short-term trend reversal for EUR/GBP. EUR/GBP changed hands in the 0.7780 area at the start of trading in Europe.

Around the open of the European equity markets, (currency) markets reacted to an interview of ECB’s Nowotny as he mentioned the idea of giving the ESM a banking license. This gave the euro a short in the arm. However, the key factor for sterling trading was the first estimate of the Q2 UK GDP.

The UK economy contracted by a shocking 0.7% Q/Q, miles away from the 0.2% decline expected by the consensus. Of late we often mentioned that UK eco data were no big issue for EUR/GBP trading. Poor data were often ignored. However, this time the negative surprise was so overwhelming that even EUR/GBP couldn’t ignore it. All I can say is thank god for the Olympics; otherwise all of the UK would be in a mad panic.

So, in a first move the pair jumped to the 0.7840 area. From there the rebound slowed, but the pair remained well bid. The pair reached an intraday top at 0.7854 mid afternoon. Later in the session, the rebound of the euro lost some momentum overall. EUR/GBP closed the session at 0.7844, compared to 0.7779 on Tuesday evening. This was the first really significant rebound in this cross rate since end June. 

Today, there are no important eco data on the calendar in the UK. So, EUR/GBP trading will be driven by global market sentiment and by technical considerations. In a short-term perspective, we have turned less negative on the EUR/USD headline pair. However, this is mostly due anticipated dollar caution ahead of next week’s Fed meeting. In theory, this should affect EUR/USD and cable in a similar way. Nevertheless, we think that yesterday’s GDP release and yesterday’s significant rebound in EUR/GBP might put a cap on further sterling against the euro short-term. We amend our ST bias in this cross rate from negative to neutral and look out whether a correction might be in store.

Sustained trading beyond 0.7950 (previous range bottom) would improve the short term picture in this cross rate.  From a technical point of view, the EUR/GBP cross rate was captured in a consolidation pattern following a longstanding sell-off that started in February and ended Mid-May when the pair set a correction low at 0.7950. From there, a rebound/short squeeze kicked in. However, the move had no strong legs and finally, EUR/GBP dropped below the 0.7950 range bottom. This break opened the way to the next high profile support, in the 0.77 area (Oct 2010 lows). Last week, the decline slowed a bit, but the trend remained clearly intact.

Earlier this week there was a first setback, but it didn’t change the global picture. The 0.77 area is still an obvious long term target on the charts. However, yesterday’s rebound might mark a short term reversal signal. So, stop-loss protection/partial profit taking on EUR/GBP shorts can be considered. 

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