4Xlounge Market Insights – EUR/GBP – Fundamental & Technical Picture

EUR/GBP – Fundamental & Technical Picture

Trends in the Forex market develop as a result of two currencies moving in opposite directions under the weight of their own respective economic forces, which can most easily measured through the stream of data reported on a daily basis. Today two significant economic reports were released, both of which were contrary to their long-term trends. However the charts help to confirm that a one piece of news does not make up a new trend. But rather long-lasting trends are the result of many economic events that agree in their primary direction.

UK CPI

We begin with UK CPI (Consumer Price Index), which was report to have slowed for a second consecutive month at a rate of 4.8% compared with the previous month’s release of 5%. As the CPI is a broadly followed gauge of inflation, traders look to this figure as they anticipate the likelihood of higher or lower interest rates in the near-term future. The following chart illustrates the approximate correlation that exists between the monthly CPI data and the BOE’s (Bank of England) historical interest rates. Although this relationship is not perfect, over the long run a strong CPI figure may lead traders to anticipate higher rates, as a weak CPI may translate to a weaker GBP currency.

UK CPI & Bank of England historical interest rates

EUR ZEW

In the Euro-zone the German Investor Confidence number (also known as the ZEW) was reported to have increased for the first time in 10-months taking many traders by surprise as its long-term trend to the downside has existed for quite a while. As Germany is one of the strongest and most influential economies in the Euro-zone, the ZEW tends to also enjoy a non-perfect relationship to the EUR/USD currency pair. Today’s trading action actually showed quite a bit of weakness in the EUR (currency) as fears of the debt contagion crisis in Europe intensified. However over the long-term if the ZEW is able to continue higher, traders may also expect the strength to find its way into the EUR currency.

ZEW & EUR/USD

EUR/GBP

Nevertheless one or two economic numbers does not make a trend. The following daily chart shows a steady and consistent channel to the downside in the EUR/GBP currency pair as the fundamental forces have continued to emerge in a much more negative fashion in the Euro-zone than in the UK. If we would expect this chart to reverse course, it would be the result of not only a drastic improvement in the EUR fundamentals, but also a significant deterioration in the UK economy, and would surely not be a surprise to even the most passive market observer.

EUR/GBP - Daily chart

For that reason, when a trend does exist it is in our best interest to only look for those trades that agree with the trend, in this case to the downside. Of course this does not dictate at which specific price we should aim to enter the market. However basic chart analysis can help us identify where the market may find future (lower) resistance, and the ideal price to ‘sell-short’. In this particular case, traders may draw the conclusion that our former long-term (down-trending) support may in fact become new resistance; perhaps between the .8400 & .8500 figures. If not higher resistance may emerge as high as .8700. With that said, it is still most important to recognize the trend, and do our best to take advantage of this pattern as long as the current fundamental picture continues to confirm its behavior.