EURGBP – Bank of England considering a further expansion

The pound got under pressure yesterday after a release of the latest BoE minutes. While there is no agreement between all member of the Council as to the need for a further action, some members indicated that a need for more expansion increased from the last meeting. As a result, market rates on the GBP fell, and a spread vs the dollar and euro rates decreased (even though yields on US and German bonds were declining as well). Consequently, the pound was losing ground vs. euro and Swiss franc.

The development was important technically, as the EURGBP climbed above the July’s high of 0,8530 and is on track to test key resistances at 0,8607 (100% expansion of a similar move from July) and 0,8620 (an upper line on ascending channel). These resistances may encourage some profit taking after a dynamic rise on the pair. One should look at the global markets for directions as the next key data from the UK are next week’s final GDP and industrial PMI.

EURUSD – highest in 5 months

Despite a significant drop in market rates for the EUR, the euro continued to appreciate vs the dollar yesterday reaching 1,3439. Therefore, the target on the daily interval (that is Augusts’ high of 1,3334) was achieved with a surplus.

For longer-term scenarios one may look at the monthly interval where the last few months were reminiscent of a development from end-2008 and early 2009. Specifically, in both cases sharp declines ended with a spin candle (Nov’08, Jun’10), a rebound creating a sort of a morning star (Oct’08-Dec’08, May’10-Jul’10), a correction partly negating that formation (Jan’09, Aug’10) and finally a rise above a sharply declining trend line. The difference is, that in 2009 it took longer (another spin candle in Feb’09) and thus the bottom was somewhat solidified (with a double-bottom formation) while this time a rally might look a bit too rapid. Nevertheless, should it persist, we would talk about levels of 1,42-1,44 in few months’ time – an upper line of a long-term declining channel. A major fundamental risk for the euro is – no surprise – a fiscal issue. Despite a recent rally on the euro, the credit spreads of the PIIGS countries do hover around a record highs.  

Events to watch – claims, used home sales

Initial claims (8.30 ET, 14.30 CET, consensus 450k) showed some signs of improvement recently and thus used home sales data (10.00 ET, 16.00 CET, consensus 4,1 mln) may attract more attention. After the tax deductions for home purchases were terminated, used home sales plummeted in July (from 5,3 to 3,8 mln) and investors may hope that at least it was the bottom. Flash PMIs will be released in Europe (4.00 ET, 10.00 CET).

Przemysław Kwiecień, Chief Economist

Disclaimer, investment risk warning
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