EUR/GBP – Why its Near a Top

EUR/GBP – Why its Near a Top

EUR/GBP – Why its Near a Top

EUR/GBP climbed to a 3 year high today on the fear that this week’s U.K. economic reports will be ugly. We are generally concerned about the outlook for the U.K. economy but also cognizant of the risk of a top. The last time there was an uninterrupted rally in EUR/GBP as long as this one was in June 2011. When the pair topped after running 8 straight days without a correction, the sell-off took EUR/GBP from a high of 0.8975 to a low of 0.8277 in a matter of days. The reversal was almost as aggressive as the previous rally. Short sterling positions are at record highs so the chance of a top is strong.

Fundamentally, investors have every reason to be worried because these are the first set of post Brexit numbers and the fear is that they will be ugly. Between the GfK consumer confidence index, the RICS house price balance and today’s Rightmove report, the sting is being felt across the country. The government may have no plans to invoke Article 50 this year but the damage has been done and consequences are just beginning to appear. But weakness in sterling this week is not a given. We are confident that the labor data will be soft but the surprise increase in the BRC retail sales monitor suggests that discounting may have fueled stronger demand in July. At the same time, in their Quarterly Inflation Report, the Bank of England said a weaker pound could drive up inflation, which would be consistent with the smaller decline in shop prices reported by the British Retail Consortium. Any upside surprise could lead to a short squeeze in the pound.

Technically, the next major resistance level of resistance for EUR/GBP is 0.8765, the July and August 2013 high. Near term support is at 86 cents. If it breaks, we expect a quick slide to 85 cents.

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