By Gary Howes
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"EUR/GBP declined significantly yesterday near the resistance implied by the steeper declining trendline. Hourly supports stand at 0.8210 (24/01/2014 low) and 0.8168. A resistance lies now at 0.8306.
"In the longer term, the technical structure remains negative as long as prices remain below the resistance at 0.8350 (13/01/2014 high). Monitor the support implied by the 61.8% retracement (of the 2012-2013 rise) at 0.8160.Another key support can be found at 0.8082 (01/01/2013 low)."
"EUR is weak, down 0.2% since yesterday’s close and flirting with a break below its 50‐day MA of 1.3648. We are EUR bears, not believing that it will remain a strong currency backed by weak fundamentals.
"We found weekend comments by President Draghi, that the ECB would consider buying private sector loans a clear sign that central bank policy in Europe will prove more accommodative for longer than either the BoE or the Fed. This is likely to prove a significant weight against EUR in the second half of this year.
"Today, fundamental data releases were not the focus, with the core release a softer than expected German import prices, flat m/m and –2.3% y/y."
"We think the performance of the economy in levels matters significantly to the MPC and for this reason a few consecutive quarters of strong growth are unlikely to lead to an imminent Bank Rate increase despite the recent sharp fall of the unemployment rate to 7.1% (close to the 7.0% threshold of the forward guidance framework).
"We forecast the MPC to start hiking in Q2 15 given the strong turnaround in the economy and labour market, although we think that a hike as soon as 2014 would be premature in the current environment of subdued inflation pressures and would risk choking off the recovery."
"A strong GDP report would raise fresh doubts about how long the BoE could hope to keep the policy rate at 50bp, whatever assurances are likely to emerge from the inflation report. It would also create an interesting backdrop for Governor Carney’s speech scheduled for Wednesday. Lastly, we would have to imagine a sterling-positive outcome to such a turn of events, but would rather play it on the crosses rather than against the dollar given the FOMC is likely to announce another round of tapering on Wednesday."
Sasha Nugent at Caxton FX reckons the Bank will be come increasingly vocal on the matter and will attempt to talk sterling lower:
"Reasons behind a strong pound seem to be coming in full flow, and the strong UK GDP reading adds to the list of positive UK data supporting the pound. The strength of sterling has come under scrutiny recently by the BoE, and it may not be long before the central bank’s message is received and the pound gives up some of its recent gains. Given the momentum behind the pound, it is unlikely the single currency will be able to do curb losses and so the only way is up for GBP/EUR today."
We forecasted this would happen if UK GDP numbers met expectations.
Traders wanted to see an outperformance today if they were to take the British pound sterling higher, this did not happen and we are seeing selling. We doubt any sell-off will be deep.
Our expectations of a solid UK GDP may again help cable at the 1.6580 area. Yet, we would prefer not to get involved at these levels as there is too much optimism in sterling so that potential disappointment in the data may spark a vicious sell off. Mixed signals by BoE Carney may also induce markets to question the BoE’s credibility.
"Pound is still forming the fifth ascending structure towards level of 1.6680. Later, in our opinion, market may form descending correction to reach level of 1.6475 (at least) or even 1.6255"
Signs are that markets appear to be forecasting an outcome that sits above consensus.
Lloyds Bank say:
"Our economists forecast GDP growth to have risen by 0.8% q/q, marginally higher than consensus forecasts of 0.7%. Although our economists do highlight some downside risks to their forecasts owing to the surprisingly softer manufacturing and constriction data in November and subdued services output in October.
"Looking at the breakdown on the Bloomberg survey, more economists are forecasting 0.8%, even though 0.7% is the median forecast. Either a 0.7-0.8% print should further support the underlying positive sentiment towards GBP. But given the move in GBP overnight we think a stronger print maybe now priced in so a 0.7% print could trigger a knee jerk move lower in GBP."
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