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    EUR/GBP’s kick-back rally pounded

    The EUR/GBP has come under a bit of pressure today amid continued uncertainty surrounding Greece and following the release of some economic data from both the Eurozone and UK. Admittedly, the Eurozone services PMIs were not bad with Spain’s one being the most eye catching, which printed 56.7 for January versus 54.3 in December. Italy’s PMI also expanded as it came in at 51.2 after dipping below the boom/bust threshold of 50 the month prior.  What’s more, the overall Eurozone PMI was revised higher to 52.7 from 52.3 while retail sales in the single currency bloc also rose unexpectedly by 0.3% month-over-month in December. But it just happened that the UK data was once again stronger: the key services sector PMI here jumped to 57.2 from 55.8 in December, easily beating expectations for a 56.6 reading. UK’s construction and manufacturing PMIs have also topped expectations this week. Although a rate hike is still some time away but when the time comes, it is likely that the Bank of England will do it well before the European Central Bank. On that basis, the long-term direction of the EUR/GBP is likely to remain to the downside.

    Indeed, from a technical point of view, the EUR/GBP looks in danger of resuming its longer term downward trend following the recent counter-trend move. As can be seen from the monthly chart, it has recently broken below a very long-term bullish trend line and so the path of least resistance is clearly to the downside on this timeframe. This bearish view will remain valid for as long as the EUR/GBP holds below the key resistance level of 0.7770. The long-term support level to watch is around 0.7255. Not only does this correspond with the 61.8% Fibonacci retracement level of the long-term upswing but it was also formerly resistance. Thus it could provide some short-term support, should we get there. 

    Meanwhile the near-term technical outlook on EUR/GBP is also looking weak. The cross has already broken below the corrective trend line after failing to crack the 0.7580/95 resistance area on Tuesday. Therefore a potential break below the next support around 0.7225 could lead to a move down towards the Fibonacci extension levels shown on the 2-hour chart, and potentially beyond.  On this time frame, only a decisive break above 0.7595 would end the short term bearish outlook.

    Figure 1:

    Source: FOREX.com

     

    Figure 2:

    Source: FOREX.com

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