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EUR/USD Falls to Crucial July 2012 Trendline; GBP-crosses Resilient

EUR/USD Falls to Crucial July 2012 Trendline; GBP-crosses Resilient

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- EURUSD at July 2012-2013 uptrend, nearing June 2014 lows.

- EURGBP breakdown matched by GBPCHF; watch GBPCAD.

- Reminder that July forex seasonals in QE era work against USD.

Like in the case of the US, a sustained decline in the UK unemployment rate will be required below 6.5% in order to generate upside inflationary pressures as indicated by the traditional Philips curve. The Philips curve is an observation that inflation and unemployment tend to be inversely correlated; the UK Phillips curve is rather flat at the moment suggesting the recent decline in the UK unemployment rate has done little to boost the inflation picture.

All of these economic developments have left the British Pound in an interesting and promising position. The strength of the labor market and broader economic growth indicators have been the underpinning for Sterling strength. So too has been the promise that interest rates would remain lower for longer even after the February removal of the labor market threshold. An elevated British Pound exchange rate serves as a buffer against ‘imported inflation’, allowing the Bank of England to execute its lower rates for longer strategy.

For now, we may be near the end of the churning period for the British Pound in which there is a continual tradeoff between weaker wage and inflation data and improved economic data surveys, namely those labor related. The June CPI report yesterday showed faster than expected headline price pressures, lifting the Pound, in contrast to today's weak wage data which knocked back the Pound.

As long as the jobs picture remains strong through the summer months and the UK unemployment rate drops through 6.5%, there is a distinct possibility that CPI readings stay before the fourth quarter of 2014 – only then will Bank of England rate hike speculation reignite, and the British Pound should be supported throughout.

See the video above for a wide range of technical setups: EURUSD, EURJPY, EURGBP, GBPCHF, GBPUSD, USDCAD, and GBPCAD. Whereas volatility has been rather dry, the past few days have seen a quick uptake in some of the patterns we've explored recently (buying dips in GBP-crosses, EURJPY and EURUSD technical sell signals, and the breakdown of the Canadian Dollar).

Read more: Put GBP/CAD on Your Radar as GBP/USD, GBP/CHF See Key Reversals

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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