Top Trade Idea for August 14th, 2013 – EUR/GBP

EURGBP may find support at channel base

Fundamental backdrop:

There were significant data releases this morning out of the Euro zone and the UK. Preliminary 2Q GDP figures out of major European economies and the Euro zone as a whole showed that the region has returned to growth after a year and a half long recession. The euro area’s two largest economies, Germany and France, both beat growth expectations with quarterly increases in GDP of 0.7% (cons. 0.6%) and 0.5% (cons. 0.2%) respectively. This was enough to lift Euro zone growth by 0.3% in 2Q which was more than the 0.2% anticipated.

In the UK, the Bank of England’s (BoE) Monetary Policy Committee (MPC) meeting minutes were released to provide additional insight into the August 1 meeting, when policymakers agreed to introduce forward guidance. The guidance indicated the Bank’s intention to keep rates low until unemployment falls to 7%. Minutes showed a dissent on forward guidance from Martin Weale who favored a shorter period of guidance which was viewed as having a relatively hawkish undertone. Furthermore, with increased emphasis on labor, employment data out of the UK has had more significance. UK labor data was released this morning and was better than expected with a -29.2K drop the July jobless claims (exp. -15.0K) and increase in average weekly earnings of 2.1% (cons. 2.0%). The unemployment rate was steady as expected at 7.8%. Overall, the data was GBP supportive which helped the pound strengthen against its major counterparts. However, we think that more clarification is needed regarding the BoE’s guidance which may display Governor Carney’s dovish stance and could weigh on the GBP moving forward.

Technical picture:

The GBP is outperforming the EUR despite better than expected Euro zone growth figures and EURGBP has fallen to test a major pivot. EURGBP has been trading within a bullish trend channel for the past several months and the pair is now testing the base of the channel which also converges with the 100-day simple moving average (SMA) and 61.8% Fibonacci retracement of the rally from April lows to August highs. These technical levels converge around 0.8540 and represent a major pivot. A daily close below would indicate a violation of the bullish channel and suggest the potential for a deeper correction.
While support holds, we expect to see a continuation higher within the channel. Initial resistance may be found around the 0.8585 area which contains the 50% retracement and 55-day SMA. The next key level above that is the convergence of the 21-day SMA and 38.2% Fibonacci level around 0.8625/30. Furthermore, the daily RSI indicator is approaching a horizontal support zone and is worth monitoring. If the indicator rebounds from the horizontal, this would support our bullish bias, however a break below may be a warning that prices are vulnerable break lower as well.

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