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EUR/GBP at a crossroads, could it go higher?

The EUR/GBP pair is at a critical crossroads with the potential for a move higher on the horizon.

The long-term chart below shows the pair in a descending channel which has recently found support at the lower channel line as well as the 200-month MA. These two levels are very strong support points which could very well lead to a move higher evolving.

EURGBParticlepic1

The evidence for sterling depreciating is not just technical but fundamental too.

Inflation

One fundamental weighing on the pound is the negative inflation recorded in April, which was the first time the economy fell into deflation since the 1960s. Although economists put the fall in prices down to the drop in global oil prices, and see the effects as transitory – as well as positive for the economy – they assure investors that interest rates will remain low for some time to come, as the BOE will never raise its lending rates in a negative inflation environment.

This contrasts with Euro-zone inflation which is rising and expected to rise to 0.3% in May, as can be seen from the chart below:

euro-area-inflationUKinflation

Growth

Slowing growth is another fundamental reason why the pound may depreciate. GDP in Q1 slowed to 0.3% from 0.6% in the previous quarter – slowing to a level not seen since 2013.

Year-on-year the growth rate also hit a 2-year low of 2.4% – a fall of 6 basis points from the 3.0% of the previous quarter.

The main reason for the slow-down appears to be a fall in Exports, which the strong pound is not helping, providing a further disincentive to the BOE raising rates.

The slow-down in the U.K has begun to contrast with a speeding up of previously moribund euro-zone growth, as shown by the cross-over on the comparison growth charts below:

united-kingdom-gdp-growth

Nevertheless despite this, on an annual basis the U.K still enjoys a much faster pace of growth compared to the Euro-zone with its 1.0% yoy compared to the U.K’s 2.4%.

Greek spoiler

One major factor which is weighing on the euro and keeping EUR/GBP at its current low level is uncertainty over what could happen in Greece. If there is a default, for example, the pair could fall even lower as the euro would be expected to weaken considerably.

Alternatively if negotiators find a middle ground of compromise and Greece is prevented from defaulting I see this as a major fundamental driver – along with the high growth and differentiating inflation – which could help provide the impetus for a ‘lift-off’ for the EUR/GBP pair and lead to a rise up towards the top of the descending channel and the 0.8000 region.

Such a reversal would gain technical confirmation from a break above the 0.7481 May highs.

The EUR/GBP pair is at a critical crossroads with the potential for a move higher on the horizon.

The long-term chart below shows the pair in a descending channel which has recently found support at the lower channel line as well as the 200-month MA. These two levels are very strong support points which could very well lead to a move higher evolving.

EURGBParticlepic1

The evidence for sterling depreciating is not just technical but fundamental too.

Inflation

One fundamental weighing on the pound is the negative inflation recorded in April, which was the first time the economy fell into deflation since the 1960s. Although economists put the fall in prices down to the drop in global oil prices, and see the effects as transitory – as well as positive for the economy – they assure investors that interest rates will remain low for some time to come, as the BOE will never raise its lending rates in a negative inflation environment.

This contrasts with Euro-zone inflation which is rising and expected to rise to 0.3% in May, as can be seen from the chart below:

euro-area-inflationUKinflation

Growth

Slowing growth is another fundamental reason why the pound may depreciate. GDP in Q1 slowed to 0.3% from 0.6% in the previous quarter – slowing to a level not seen since 2013.

Year-on-year the growth rate also hit a 2-year low of 2.4% – a fall of 6 basis points from the 3.0% of the previous quarter.

The main reason for the slow-down appears to be a fall in Exports, which the strong pound is not helping, providing a further disincentive to the BOE raising rates.

The slow-down in the U.K has begun to contrast with a speeding up of previously moribund euro-zone growth, as shown by the cross-over on the comparison growth charts below:

united-kingdom-gdp-growth

Nevertheless despite this, on an annual basis the U.K still enjoys a much faster pace of growth compared to the Euro-zone with its 1.0% yoy compared to the U.K’s 2.4%.

Greek spoiler

One major factor which is weighing on the euro and keeping EUR/GBP at its current low level is uncertainty over what could happen in Greece. If there is a default, for example, the pair could fall even lower as the euro would be expected to weaken considerably.

Alternatively if negotiators find a middle ground of compromise and Greece is prevented from defaulting I see this as a major fundamental driver – along with the high growth and differentiating inflation – which could help provide the impetus for a ‘lift-off’ for the EUR/GBP pair and lead to a rise up towards the top of the descending channel and the 0.8000 region.

Such a reversal would gain technical confirmation from a break above the 0.7481 May highs.



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