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Forex Analysis
Today’s European final inflation data came out this morning with a slight rise in the CPI y/y to 5.9% and an as expected Core CPI reading of 2.7%. The 3.2% more inflation in the headline figure over the Core figure reflects the spike in energy and food prices that we have seen before, during and will for some time after the war in Ukraine. The OECD reported today that the global inflation rate hike will be around 2.5 percentage points higher and that will have a 1 percentage point detrimental effect on global GDP. In a speech given by ECB President Lagarde today, she stated that Inflation expectations have also converged to our target of 2% across a range of measures, while inflation has become broader, and measures of underlying inflation have risen. These measures have been influenced by energy prices and supply bottlenecks, but with pipeline pressures swelling, the upward impact may last for a while. An indicator of “sticky price inflation”, which captures items whose prices are changed less frequently, rose to 2.9% in December last year.
Personally, I don’t see how the ECB is going to stabilise the inflation rate without doing something proactive as a global inflation rise is going to prevent the EU inflation from coming much lower any time soon.
In the speech from President Lagarde today she quoted Bertrand Russell and said, we face an eternal test of “how to live without certainty, and yet without being paralysed by hesitation”.
With the Bank of England, and other major central banks tightening policy the ECB will be left behind. Maybe they feel the euro will depreciate and that will help exports when the supply chains get back up and running. Maybe the war in Ukraine will be a drawn-out affair and keep inflationary pressures higher for longer. Currently, the market is pointing to lower prices in the euro crosses. The benchmark US 10-year yield is at 2.153% as the Fed go into their first-rate hike cycle since 2018. The UK Gilt is up at 1.612% but the German Bunds yield is only just positive coming in at 0.396%. Add in a whole load of uncertainty and the flows from the euro to the US dollar and pound should remain for a while longer, especially as the ECB appears to be paralyzed in their monetary policy decision making.
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The path of least resistance for the EURGBP is to the downside. 3-month momentum is bearish, there has been a sweep of the liquidity below 0.8280 and the subsequent bounce has not been able to penetrate the balance area between 0.84713 and 0.87193. The centre line in that zone would be around 0.86000, so if there were to be a bullish move prices could be capped at that level. A move down to the 0.8000 big figure just looks a lot easier and would be in line with the monetary policy divergence.
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The momentum to the downside will accelerate if the EURGBP can close below the 0.83591 daily fractal. If that occurs the initial profit target would be 0.83040 which is the daily high from 7th of March 2022. This trading hypothesis is invalidated with a move above the fractal high from Tuesday at 0.84553.
