By Russell Glaser
Yesterday’s UK Q1 GDP release helped to put the Bank of England hawks back in charge in the debate over monetary policy. This should support sterling in the near term as traders continue to favor currencies with rising rates. As such, the EUR/GBP uptrend is stalling at a significant resistance level and an increase in rate expectations will only server to turn the tide in favor of sterling.
Uncomfortably high levels of inflation near the BOE target of 4% are claimed to be caused by increases in energy and food prices. These pressures do not appear to be one off events according to the March CPI report that showed inflationary pressures rose on a year over year basis to 4%. While this is down from a previous release of 4.4%, this level of inflation still remains unsustainable in the long term.
The BOE has resisted pressures to raise interest rates and rightfully so. Any tightening of the accommodative monetary policy may have the effect of choking off the UK economic recovery prematurely. The previous GDP report underscored those fears as the UK economy contracted by -0.5% in Q4 2010. Yesterday’s release of British Q1 GDP of 0.5%, a level in-line with economists’ expectations shows the UK economy has sustained little growth over the past 6 months but does not appear in danger of falling back into the red.
This GDP report may help to solidify the position of the BOE MPC member hawks as they lobby for a UK interest rate increase. In turn this should support the pound with an increasing interest rate differential.
Looking at the daily chart of the EUR/GBP, the uptrend in February has stalled at the 0.8923 level for the second time this month creating a double top reversal pattern. Last October the pair suffered a similar fate as it was unable to garner much support above this price, rising to a high of 0.8940. An entry short may be appropriate with tight stop placed above this level. To the downside, support comes in at the current trend line at 0.8810, followed by the previous trend line from December 2008 high which is found at 0.8700.
Could it be that the royal wedding will also help to turn the tide in favor of the pound?
Forex Market Analysis provided by ForexYard.
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