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IronFX Intraday Comment | EUR/GBP | 19/01/2016

• The dollar traded lower against most of its major counterparts during the European morning Tuesday, ranging from -0.87% against AUD to -0.29% vs CAD. The greenback traded higher against JPY and EUR in that order, while it remained virtually unchanged against CHF.

• The UK inflation rate accelerated to 0.2% yoy in December from 0.1% yoy the previous month, while the core CPI also accelerated and beat expectations of an unchanged reading. The British pound strengthened on the news, but gave back all the gains immediately and traded even lower within the following hour. What’s more, the rise in the inflation rate confirmed the Bank of England’s view of a ‘gradual’ increase in the inflation rate as past declines in oil prices drop out of the yearly calculation. With the inflation rate still at near zero levels, there is little to no pressure on the Bank to start raising rates. Having in mind also the uncertainty surrounding the “Brexit” referendum, we believe it’s almost impossible for the BoE to raise interest rates before H2 2016. Therefore, the selling pressure on sterling is most likely to continue.

• The German ZEW survey for January showed that while the current conditions index rose from December, the expectations index declined, but not by as much as expected. The decline in the expectations index came mainly as a result of concerns that the slowdown in China and other EM economies will persist in the coming months. Given today’s soft data out of China, we believe that the expectations index may remain low for a while, perhaps until China and the other EM economies begin to recover, or at least stabilize. EUR/USD gained a bit on the news, but reversed its gains and continued to trade almost unchanged within the next hour.

• EUR/GBP declined after hitting resistance near the 0.7650 (R1) barrier, but the move was halted just above our 0.7585 (S1) support line. Even though the short-term outlook remains positive, a downside corrective wave could be on the cards before the next positive leg. A clear break below the 0.7585 (S1) area could carry larger bearish implications and perhaps challenge our next support zone at 0.7540 (S2). Our short-term momentum signs support this notion. The RSI lies near its 50 level and is pointing down, while the MACD, has topped and fell below its trigger line. Switching to the daily chart, I see that on the 8th of January, the rate managed to emerge above the upper bound of the sideways range the pair had been trading since the beginning of February 2015. This has turned the medium-term outlook somewhat positive.

• Support: 0.7585 (S1), 0.7540 (S2), 0.7500 (S3)

• Resistance: 0.7650 (R1), 0.7700 (R2), 0.7740 (R3)

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