Pound Moving in Tight Ranges Against Euro and Dollar Ahead of ECB rate meeting and PMI's on Friday

The pound is in a range as traders await UK July PMI data on Friday, which will show the extent that Brexit has impacted on the economy in July.

On Monday BOE’s monetary policy mandarin Martin Weale gave a speech on monetary policy.

The BOE official said that he advocated waiting before cutting rates, saying that not enough was known yet about the impact of Brexit to take action.

He said that leaving the EU had created a great deal of uncertainty but that:

“This uncertainty points to the argument that we should wait for firmer evidence before making any policy change at least in the absence of any strong arguments for an immediate change.”

He rejected concerns that if the BOE did not act in August it would ‘disappoint markets’ saying:

“The old lady of Threadneedle street is not a nurse to markets.”

He also dismissed the argument that the BOE should cut rates to “reassure people,” saying:

“In contrast to the experience of 2008, I do not have any sense that either consumers or businesses are panic-struck and, as I observed, there have been no material signs of financial panic.”

Weale further added that wage growth over the last few months had been faster than that consistent with inflation targets.

He also said that the current low interest rates limited the impact of quantitative easing (QE), and that ‘helicopter money’ is a fiscal issue for the government to decide.

The pound rose 0.2% following the remarks which come as an antidote to Chief Economist Andy Haldane’s comments released on Friday which argued for a more robust policy response in August, including material stimulus measures.

Monetary policy official Gertjan Vlieghe, the one dissenter at the last Monetary Policy Committee (MPC), continued to claim the economy needed more stimulus at the weekend, despite financial market’s calming down substantially since the referendum vote.  

Pound trying to push higher

The pound appears to be trying to push higher at the start of the week, but is finding upside progress a struggle.

The GBP/USD pair has formed an inverse head and shoulders pattern at the lows.

If the exchange rate breaks above the neckline of the inverse H&S at 1.3500 that would signal a move up towards the next target to the upside at the monthly pivot (PP) at 1.3800.

MACD crossing its signal line is another signal the pair might be extending higher.

Commerzbank's technician, Karen Jones is also bullish:

“This correction higher looks set to extend further than we originally thought and we should allow for a rally to 1.3534 and potentially 1.3638, the 0.382% retracement of the recent sell-off.”

EUR/GBP

The EUR/GBP appears to have formed a head and shoulders pattern at the highs which looks poised to break lower.

If the exchange rate pierces the neckline at 0.8200 then it will probably move down to the next target at 0.8110, at the 50% retracement – a common level for prices to pause or stall at.

Lloyd’s Commercial Banking’s Robin Wilkins says that in the long-term he sees the current move up as the last to the upside for the pair:

“Long term, in conjunction with the GBPUSD view above, we believe this move to the topside is the last within the correction from the 0.7000-0.6900 support region.”

Commerzbank’s Karen Jones, however, is more bullish longer-term and suggests that the Elliot Wave count is eventually pointing to an extension to the 0.90s but that in the meantime the pair remains “downside corrective.”

This ‘downside corrective’ move could go deeper in the short-term, with the possibility of a move down to 0.8110, where the 50% retracement level sits – which is the same target as us.

“EUR/GBP charted an inside day on Friday and remains near term downside corrective and the Elliot wave count on the daily is pointing to a 0.8229/0.8110 retracement prior to recovery.”

Once the correction completes, however, the pair is expected to continue bullishly rising:

“Beyond a small correction the market remains on course for the 0.8815 February 2013 peak. Please note that we have various Elliot wave counts that suggest that the move will extend towards the 0.9250 area.”

GBP/EUR

The pound to euro pair is rising in what appears to be a rising wedge pattern.

Although it is still too early to say for sure, if this is the case, then the pair will probably continue moving higher but will eventually break down once the pattern is complete, as it is a bearish pattern.

As such a move below the 1.1900 level would probably signal a continuation down to an initial target at 1.1800.