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Let's take one last look at my favorite pair, before Wednesday's death by recession. Tomorrow, UK GDP is expected to show that the UK is deep in a recession. Wednesday’s Q2 GDP release should shift the focus back to fundamentals, where the y/y pace of contraction is expected to fall from 0.2% to 0.3%. A weak release is likely to put further pressure on the ruling coalition, and a lack of political support for austerity will increase the potential for the UK to lose its AAA rating.
The UK economy is almost universally expected to remain in recession when Q2 GDP figures land on Wednesday next week and thus commence the European GDP reporting cycle over coming weeks. This would be the third consecutive contraction in UK GDP, as all but six out of 36 forecasters expect a negative print.
On Monday, sterling finally fell prey to profit taking. Cable was hit by a sharp profit taking move. Of late, cable mostly outperformed EUR/USD in this kind of risk-off correction. However this was not the case yesterday. There were no important eco data on the calendar in the UK. So, we assume that the move was in the first place a technical repositioning after the recent extended decline in EUR/GBP. At the same time, the performance of the single currency overall wasn’t that bad compared to the risk-off sentiment on other markets. So EUR/GBP started a corrective rebound that lasted through the rest of the day.
Similar corrections were seen in the likes of EUR/NOK, EUR/AUD, and to a much lesser extent in EUR/SEK (and this move was already undone in overnight trading). EUR/GBP closed the session at 0.7814, up from 0.7783 on Friday evening.
Today, only the BBA loans for home purchases will be published. This is no market mover. We look out how far yesterday’s correction has to go. To be honest we don’t see a trigger for a U-turn at this stage. However, after the recent steep decline some further temporary consolidation might be on the cards.
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. Yesterday, there was a technical setback, but it didn’t change the global picture. We still assume that EUR/GBP is headed for the 0.77 target, even as it might take some time for the pair to digest oversold conditions.