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2 Intraday Rallies Few Could See Coming

2 Intraday Rallies Few Could See Coming

Boris Schlossberg, Technical Strategist

Amid horrendous new data from the UK and persistent weakness in the British pound and euro, rather surprising rallies unfolded Tuesday in the EURUSD and EURGBP currency pairs.

The EURUSD rally fizzled by mid-day in North American trade as the pair ran into resistance at key levels on the EURGBP cross and reports of some EU banks seeking capital provided intraday traders with an excuse to lock in profits.

Earlier in the session, the EURUSD pair rose to a high of 1.3073 on the back of strong buying in the EURGBP cross, which hit a high 8777 before meeting stiff resistance and dropping back to 8740 by the end of European equity trade. A large investment bank reportedly put out a buy recommendation on the pair, driving it to fresh session highs.

The long EURGBP call was likely driven by the belief in persistent pound weakness rather than euro strength. Earlier, at the start of the European session, the UK saw another horrid set of numbers from the manufacturing sector, which sent GBPUSD to fresh yearly lows below the 1.4850 level.

UK industrial production declined by -1.2% versus 0.1% expected while manufacturing production sank -1.5% versus 0.0% forecast. This was the worst reading since August of last year and suggests that the manufacturing sector will weigh heavily on Q1 GDP as the contraction accelerates.

Despite Data, Pound and Euro Still Find Buyers

Today's data shows that the massive divergence between the UK's manufacturing and service sectors continues to expand with the former contracting sharply while the latter remains relatively robust. Although manufacturing is a small part of the UK economy, it will nevertheless impact the overall growth, and as such, it remains an anchor across the neck of sterling. Today's NIESR GDP estimate indicated that growth is likely to contract by -0.1% in Q1 of this year.

See related: Hard-Hitting News Moves Dollar to Fresh Highs

Despite the negative news, sterling found some bids underneath the 1.4850 level and stabilized in the aftermath of the release. Although the UK data is undeniably atrocious, the pair is so grossly oversold that the downside may be limited, barring further bad news, of course. With services sector and labor demand remaining relatively resilient, 1.4850 could have marked a near-term bottom as the pair consolidates and tries to recover towards the 1.5000 figure over the rest of the week.

As for EURUSD, the pair remains in a very tight trading range between 1.2950 -1.3050 as market participants await the next round of economic and political developments in the region. It appears that EU policymakers are coming to the conclusion that further austerity measures in the periphery economy may be counterproductive, and if this tilt towards the "relaxation of austerity" takes hold, the EURUSD may find a stronger bid on the assumption that the Eurozone economy will finally begin to recover.

See also: Key Data Looms Large for Dollar, Aussie

By Boris Schlossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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