Euro Rises Over Half a Percent Against Pound After Data Shows High Streets Quiet in June
Sterling took a hit on Thursday after Retail Sales data showed a contraction in activity in June.
EUR/GBP is trading at 0.8366
GBP/USD is trading at 1.3192
GBP/EUR is trading at 1.1955
The pound weakened on Thursday after the release of Retail Sales data showed British shoppers had tightened their belts in June, with sales on the high-street falling -0.9% from the 0.9% gain in May, and lower than the -0.6% analysts had forecast.
On an annualized basis Retail Sales rose by a less-than-expected 3.9% when it had been forecast to increase by 4.8%, from a revised down 5.2% previously.
The EUR/GBP pair rose on the news as sterling depreciated, going from 0.8335 prior to the announcement to 0.8385 afterwards.
Other data showed Public Sector Net Borrowing (PSNB) falling to 7.3bn in June, which was below the 9.5bn expected and 9.9bn borrowed in in the previous month of May.
Evidence of more fiscal discipline from the lower PSNB figure may have helped offset the decline caused by Retail Sales.
On the data front, the next big release for sterling are the Services, Manufacturing and Construction PMI’s for July, out on Friday.
These will be the first major releases for the period after Brexit so will provide a clearer picture of how the decision to leave the EU has impacted on the real economy.
The ECB rate meeting on Thursday is the main event for the euro/sterling pair, and whilst the governing council is not expected to change policy the euro could move as a result of the analysis of the economic situation and ‘growth’.
According to broker TD Securities much depends on how the ECB and President Draghi in the press conference afterwards discuss the downside risks to growth of Brexit.
If the ECB and Draghi broadly dismisses the impact of Brexit as marginal then that is likely to support then euro higher, however, if it dwells on the risks and drops hints of substantial increased policy measures in September - such as a further cut to the deposit rate – then that would weaken the euro.
The chart of EUR/GBP shows the pair pulling back after reaching the 0.8627 highs.
According to Karen Jones, technical analyst at Commerzbank, the pull-back is likely to end somewhere in between 0.8229 and 0.8110, before starting to rise again, and eventually move higher, surpassing the 0.86 highs.
“Beyond a small correction the market remains on course for the 0.8815 February 2013 peak.”
She sees the pair still in an up-cycle called an Elliot Wave from the May 25 lows.
Lloyds Commercial Banking’s analysts Robin Wilkins is not as bullish, seeing a sideways consolidation as probably developing:
“A number of studies suggest a broader correction from 0.8627 region can be seen, testing the 0.8150-0.7950 key medium term support region. If that is the case then we should start to see a lower high develop in the 0.8440-0.8380 region. A move back up through here would suggest further sideways consolidation is more likely, if not a move back to new highs.”
Jones’s analysis that there is an Elliot Wave unfolding on the daily chart, which began at the May 25 lows is compelling.
Elliot Waves generally have 5 waves and we appear to be in a wave 4 correction which began at the 0.8627 highs.
After this there should be a wave 5 back up, to at least the level of the 0.86 highs.
The current wave 4 could have further to fall but we agree with Karen Jones that downside is likely to be capped at 0.8110 where the 50% Fibonacci level and the S1 monthly pivot are situated together, producing a tough support complex.
A break below 0.8248 would probably confirm a move down to 0.8110.
Alternatively, if wave four does not plumb new depths and it begins to rise instead, then a break above the 0.8475 level would probably open the way to a move up to the 0.8627 peak gain.
