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Signs of Bullish Impetus Reverse Ahead of a Busy Week

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Pound Sterling (GBP/USD, EUR/GBP) Analysis

  • Sterling fails to inspire despite services PMI beat. Manufacturing contracts further
  • Cable heads lower despite earlier boost on elevated rate expectations that now sees UK rates potentially peaking at 5%
  • EUR/GBP with a potential bullish breakout in focus ahead of a massive week for EU economic data
  • The analysis in this article makes use of chart patterns and key support and resistance levels. For more information visit our comprehensive education library

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Sterling Fails to Inspire Despite Services PMI Beat

UK PMI data from S&P Global/CIPS revealed the same uneven growth seen in the EU report as services continue to excel while the manufacturing sector witnesses a further contraction. A global growth slowdown coupled with the hottest inflation in western Europe, poses a massive challenge for Britain’s economic outlook as stagflation concerns gain traction.

In fact, it’s the very services sector which has contributed to the latest elevated CPI print, as food and non-alcoholic beverages continue to provide upward pressure on the general level of prices.

Customize and filter live economic data via our DailyFX economic calendar

GBP/USD Technical Considerations and Levels to Watch

Cable’s bullish run has not only consolidated in recent sessions but with today’s latest decline, appears to be headed towards the recent swing low. The pair’s rise cannot be separated from the significant USD selloff as markets priced in cuts to the Fed funds rate in the second half of the year. Since then, the ‘higher for longer’ narrative has re-emerged as sticky core inflation and a relatively strong US economy has supported the value of the US dollar.

Today’s rejection of higher prices at the zone of resistance (1.2445) has the pair trading below the 20 day simple moving average (SMA) which has acted as dynamic support since mid-March, with the prior swing low of 1.2345 in sight. Thereafter, 1.2300 emerges as psychological support.

Should prices reverse higher from here, the zone of resistance at 1.2445 is the most immediate zone of interest before a return to 1.2500 and the recent swing high.

GBP/USD Daily Chart

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Source: TradingView, prepared by Richard Snow

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EUR/GBP Technical Considerations and Levels to Watch

EUR/GBP has sprung back into life towards the end of the week as EU PMI data has had a very different effect on the euro, seeing the currency pick up a bid heading into the weekend. With the ECB talking up a 25 basis point hike and even the possibility of another 50 bps hike, the euro appears well placed heading into next week where there is a massive amount of high impact economic data like EU Q1 GDP data, German inflation and of course, the continuation of major US earnings releases: Amazon, Google and Microsoft to name a few which is likely to lift volatility from current suppressed levels.

EUR/GBP has shot higher in early trade, testing the downward sloping trendline resistance. However, given the steady downtrend, it may be prudent to only assess the potential of a bullish breakout should we close above the 0.8865 level. The 38.2% Fibonacci retracement of the major August to September 2022 move at 0.8920 is the next level of resistance. Support lies at the 50% Fib retracement at 0.8810. Better than expected Q1 GDP data next week could provide the necessary impetus for the bullish breakout to gain momentum, underscoring the importance of the print.

EUR/GBP Daily Chart

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Source: TradingView, prepared by Richard Snow

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— Written by Richard Snow for DailyFX.com

Contact and follow Richard on Twitter: @RichardSnowFX

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