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    EUR/GBP breaks major channel support

    The pound has surged higher following a brief hiccup at the start of the week, supported by some really good jobs market data from the UK. The main highlight was the 2.1% increase in wage growth in the three months to December. The figure, which includes bonuses, was up sharply from 1.7% the month before and easily topped expectations.  The rate of unemployment meanwhile fell to 5.7% – the lowest since 2008. Some 73.2% of people aged 16 to 64 are in work now, which is the highest level since 2004. One of the key leading indicators of the jobs market is the change in claimant count and this fell by a surprisingly large 38,600 in January.  So, overall it was a good day as far as economic data is concerned and unambiguously sterling has risen against all the majors.

    But will the pound be able to sustain its gains going forward? This will depend to a great degree on expectations about the path of inflation and therefore the timing of the first Bank of England rate hike. Yesterday, we learned that the CPI fell to a record low of 0.3% in January from 0.5% previously. This was mainly due to the recent falls in the price of oil, as core inflation actually rose to 1.4% from 1.3% the month before.  Nevertheless unless the headline CPI starts climbing back towards the Bank of England’s 2% target, it could be a long time before we see that rate hike. This makes the pound’s bullish run a bit uncertain, although it still is probably one of the strongest currencies in G10.  Certainly against the euro, the pound could gain further because the ECB is still in a dovish mode while the BoE seems to have had enough with easing even if inflation is at an all-time low.

    On the technical front, yesterday’s price action had suggested that the EUR/GBP had ended its downward trend for the time being. The cross formed a bullish engulfing candle on its daily chart and also closed above the prior low of around 0.7400. On top of this, there was a bullish divergence on the RSI indicator. However, following the release to the robust UK macroeconomic numbers this morning, the EUR/GBP may have resumed its downward trend. It has already taken out the low from yesterday, thus violating that bullish setup.  Now that yesterday’s low has been taken out, this is likely to encourage further follow-up technical selling from both the bullish and bearish camps. The bulls, hoping for a bounce from the support trend of the long-term bearish channel (see the weekly chart) may be proven wrong, so they could liquidate more of their positions soon. The bears, sensing blood, are also likely to increase their bets should the support trend of this channel breaks.

    Therefore, the most likely outcome is a continuation of the downward trend in the EUR/GBP pair – that’s unless of course some fundamental stimulus causes the EUR to surge or the GBP to tumble. The near-term bearish targets are shown on the daily chart: 0.7350/5 and 0.7285/90. The former corresponds with the 127.2 while the latter is the 161.8 per cent Fibonacci extension level of the last upswing. The key long-term support is further lower at 0.7255. Not only was this level formerly support, but it also corresponds with the long-term 61.8% Fibonacci retracement of the entire up move from the low after the euro was formed. Beyond 0.7255 the next level down is the psychological 0.7000 handle. At this stage, a break above the 0.7455 resistance level is required to end this bearish setup. If seen, the EUR/GBP could stage a short squeeze rally towards the previous high around 0.7590.

    Figure 1:

    Source: FOREX.com

     

    Figure 2:

    Source: FOREX.com

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