Talking Points:

- GBP/USD Breaks Monthly Range Following Strong Retail Sale Report; RSI Divergence Persists.

- EUR/USD Struggles at 1.1160 Hurdle; RSI Pulls Back from Overbought Territory.

DailyFX Table

Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

GBP/USD

1.3011

1.3048

1.2937

41

111

The British Pound extends the advance from earlier this week amid the better-than-expected U.K. Retail Sales report, and the GBP/USD exchange rate may continue to track higher over the days ahead as it breaks out of the monthly range.

The pickup in household consumption instills an improved outlook for the region as it remains one of the leading drivers of growth & inflation, and the positive developments coming out of the real economy may encourage the Bank of England (BoE) to normalize monetary policy sooner rather than later as price growth exceeds the central bank’s 2% target. However, the majority of the Monetary Policy Committee (MPC) may stick to a wait-and-see approach in 2017 as officials see inflation ‘peaking a little below 3%,’ and we may see another 7 to 1 split at the next meeting on June 15 as Governor Mark Carney and Co. reiterate ‘monetary policy can respond in either direction to changes to the economic outlook.’

GBP/USD Daily

GBP/USD Daily Chart

Chart - Created Using Trading View

  • The GBP/USD relief rally appears to be gathering pace as the pair carve a near-term series of higher highs & lows and breaks out a narrow range, with the next topside hurdle coming in around 1.3090 (38.2% retracement) to 1.3120 (78.6% retracement) followed by 1.3300 (100% expansion) to 1.3370 (78.6% expansion).
  • Keep in mind the Relative Strength Index (RSI) continues to deviate from price as the oscillator struggling to push into overbought territory; may see the momentum indicator continue to threaten the bullish formation from March as it fails to mark a fresh high for 2017.

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Currency

Last

High

Low

Daily Change (pip)

Daily Range (pip)

EUR/USD

1.1133

1.1172

1.1104

26

68

EUR/USD pulls back from a fresh monthly high of 1.1172 amid renewed concerns surrounding the monetary union, and the single-currency stands at risk of facing near-term headwinds as Greece struggles to secure the next tranche of the EU/IMF bailout.

The European Central Bank (ECB) meeting minutes also appears to be weighing on the exchange rate as officials warn ‘a downward revision to the inflation outlook in the June 2017 Eurosystem staff macroeconomic projections could not be ruled out,’ and President Mario Draghi and Co. may keep the door open to further extend its quantitative easing (QE) program as the Governing Council struggles to achieve its one and only mandate for price stability.

EUR/USD Daily

EUR/USD Daily Chart

Chart - Created Using Trading View

  • Even though EUR/USD retains the series of higher highs & lows from earlier this week, the lack of momentum to to clear the Fibonacci overlap around 1.1140 (23.6% expansion) to 1.1160 (38.2% 38.2% expansion) raises the risk for a pullback especially as the RSI appears to be turning over; first downside region of interest coming in around 1.1020 (50% expansion) followed by 1.0880 (61.8% expansion) to 1.0910 (38.2% expansion).
  • Nevertheless, EUR/USD may preserve the gap following the first round of the French election as there appears to be a material shift in market behavior, and the broader outlook remains constructive as price & the momentum indicator extend the bullish formations carried over from December; will favor opportunities to buy-dips in the euro-dollar especially as the pair breaks out of the downward trend carried over from 2016.

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IG Sentiment
  • Retail trader data shows 43.5% of traders are net-long GBP/USD with the ratio of traders short to long at 1.3 to 1. In fact, traders have remained net-short since April 12 when GBP/USD traded near 1.23717; price has moved 5.1% higher since then. The number of traders net-long is 0.2% higher than yesterday and 3.1% higher from last week, while the number of traders net-short is 4.7% lower than yesterday and 10.6% lower from last week.
  • Retail trader data shows 26.6% of traders are net-long EUR/USD with the ratio of traders short to long at 2.76 to 1. In fact, traders have remained net-short since April 18 when EUR/USD traded near 1.06101; price has moved 4.9% higher since then. The number of traders net-long is 12.6% lower than yesterday and 41.1% lower from last week, while the number of traders net-short is 3.5% lower than yesterday and 28.6% higher from last week.

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--- Written by David Song, Currency Analyst

To contact David, e-mail dsong@dailyfx.com. Follow me on Twitter at @DavidJSong.

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