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• EUR/GBP has resumed its downward trajectory since the start of the year, now trading close to a 2-year low at 0.8320.
• Unfavourable political environment in France versus a newly formed Labour-led UK government that favours pro-growth policies may see further underperformance of the Euro against the Pound.
• EUR/GBP continues to oscillate within a short-term downtrend phase with key resistance at 0.8500.

Since our last publication, the price actions of the EUR/GBP have inched lower below the prior 0.8540 key short-term pivotal resistance and hit the 0.8440 short-term support as highlighted in our report.

The EUR/GBP cross pair continued to drift lower to print a recent intraday low of 0.8397 on 14 June before it traded sideways and inched lower ex-post UK general election and the second round of the French legislation election.

The Euro has started to lose its shine against the Pound

Fig 1: EUR/GBP major trend as of 11 Jul 2024 (Source: TradingView, click to enlarge chart)

After the outcome of the Brexit referendum held on 23 June 2016, the EUR/GBP cross pair gained by 25% in the next four years and rocketed to a high of 0.9500 in March 2020 on the onset of the Covid-19 pandemic.

One of the key primary drivers of the underperformance of the GBP against the EUR during the period from 2016 to 2020 has been the negotiation process of Brexit which was both politically challenging and deeply divisive within the UK that led to two snap elections in 2017 and 2019.

Another episode of GBP’s significant underperformance was from August 2022 to September 2022 under the premiership of former UK Conservative Party Prime Minster Liz Truss sparked a mini-crisis in the Glit market due to the proposed unfunded mini-budget where EUR/GBP spiked by 10% within a month to print a high of 0.9278 on 22 September 2022.

Since the start of the year, the EUR/GBP has traded lower below its 200-day moving average (see Fig 1), and it is now hovering at close to a 2-year low of 0.8420 at this time of the writing.

Unfavourable political environment in France with a lack of pro-growth initiatives may see a shift towards UK financial assets

A change in the political climate in the UK and EU seems to be the driving force again; the newly formed UK government under the Labour Party has advocated growth policies via public-private partnerships that in turn lower the chances of a tax hike or cut fiscal spending to balance the budget books; a shift away from its traditional socialist roots.

On the flip side, the political climate of France is now in limbo as the second round of the French legislation election has led to a hung parliament with the far-left socialist alliance New Popular Front managed to take the top spot from the initial leading far-right National Rally but without a clear absolute majority to push for its aggressive fiscal spending policies coupled with higher taxes on businesses and wealthy people.

However, it will still be a challenge for French President Macron’s centrist alliance which has taken the second position in the French parliament to push out pro-growth policies and allow the current 5% budget deficit to shrink towards the 3% limit set up by the EU standard due to loggerheads with the far left.

Therefore, a lack of new growth fiscal initiatives from France, one of the economic growth engine pillars in the EU is likely to dampen the prospects of the Eurozone financial assets in favour of UK assets that also have a lower valuation.

Watch the 0.8500 key short-term resistance on EUR/GBP

Fig 2: EUR/GBP short-term trend as of 11 Jul 2024 (Source: TradingView, click to enlarge chart)

In the lens of technical analysis, the EUR/GBP has continued to trade within a short-term downtrend phase as price actions continue to oscillate within a minor descending channel since the 23 April 2024 high of 0.8645 and below its 20-day moving average (see Fig 2).

If the 0.8500 short-term pivotal resistance (also confluences with the downward slopping 50-day moving average) is not surpassed to the upside, the EUR/GBP may see a break below its recent14 June minor low area of 0.8400 for a further potential impulsive bearish down move to expose the next near-term support at 0.8345 (also the lower boundary of the minor descending channel) in the first step.

However, a clearance above 0.8500 negates the bearish tone for a minor squeeze up to see the next intermediate resistances coming in at 0.8530 and 0.8580 (also the key 200-day moving average).

Daily Pivots: (S1) 206.68; (P) 207.25; (R1) 208.34; More...

GBP/JPY's steep decline and strong break of 206.12 support suggest that a short term top is formed at 208.09, on bearish divergence condition in 4H MACD. While deeper decline cannot be ruled out, downside should be contained by 38.2% retracement of 191.34 to 208.09 at 201.69 to bring rebound, and set the range of consolidations below 208.09.

In the bigger picture, long term up trend is still in progress. Next target is 100% projection of 155.33 to 188.63 from 178.32 at 211.62. Outlook will stay bullish as long as 200.72 resistance turned support holds, even in case of deep pullback.

Daily Pivots: (S1) 174.50; (P) 174.83; (R1) 175.45; More...

EUR/JPY's strong break of 173.50 support suggests that a short term top was formed at 175.41, on bearish divergence condition in 4H MACD. But there is no clear sign of trend reversal yet. While deeper pullback cannot be ruled out, downside could be contained by 170.87 resistance turned support to bring rebound to set the range for near term consolidations below 175.41. Nevertheless, firm break of 170.87 will argue that larger correction is already underway.

In the bigger picture, long term up trend is still in progress. Next target is 100% projection of 139.05 to 164.29 from 153.15 at 178.38. For now outlook will stay bullish as long as 170.87 resistance turned support holds, even in case of deep pullback. However, firm break of 170.87 will bring deeper fall to 167.52 support. Decisive break there will confirm that larger correction in in progress for 153.15/164.29 support zone.

Daily Pivots: (S1) 0.6735; (P) 0.6744; (R1) 0.6755; More...

Intraday bias in AUD/USD remains on the upside as current rally continues to 61.8% projection of 0.6361 to 0.6713 from 0.6619 at 0.6837. Decisive break there could prompt upside acceleration through 0.6870 resistance to 100% projection at 0.6971. For now, risk will stay on the upside as long as 0.6723 minor support holds, in case of retreat.

In the bigger picture, price actions from 0.6169 (2022 low) are seen as a medium term corrective pattern to the down trend from 0.8006 (2021 high). Fall from 0.7156 (2023 high) is seen as the second leg, which could have completed at 0.6269 already. Rise from there is seen as the third leg. Break of 0.6870 will target 100% projection of 0.6269 to 0.6870 from 0.6361 at 0.6962.

Daily Pivots: (S1) 1.0817; (P) 1.0824; (R1) 1.0838; More....

EUR/USD's rise from 1.0665 resumed by breaking through 1.0844 temporary top and intraday bias is back on the upside for 1.0915 resistance. Firm break there will resume whole rally from 1.0601 and target 100% projection of 1.0601 to 1.0915 from 1.0665 at 1.0919 next. For now, risk will stay on the upside as long as 1.0805 support holds, in case of retreat.

In the bigger picture, price actions from 1.1274 are viewed as a corrective pattern that could still be in progress. Break of 1.0601 will target 1.0447 support and possibly below. On the upside, firm break of 1.0915 resistance will start another rising leg back to 1.1138 resistance instead.

Daily Pivots: (S1) 1.2800; (P) 1.2825; (R1) 1.2872; More...

GBP/USD's rally continues today and intraday bias stays on the upside for 61.8% projection of 1.2298 to 1.2859 from 1.2612 at 1.2959. Decisive break there would prompt upside acceleration through 1.3141 to 100% projection at 1.3173. On the downside, below 1.2845 resistance turned support will turn intraday bias neutral first.

In the bigger picture, price actions from 1.3141 medium term top are seen as a corrective pattern which might have completed with three waves to 1.2298 already. This will now remain the favored case as long as 1.2612 support holds. Firm break of 1.3141 will target 61.8% projection of 1.0351 (2022 low) to 1.3141 (2023 high) from 1.2298 at 1.4022.

Daily Pivots: (S1) 0.8973; (P) 0.8987; (R1) 0.9011; More…

USD/CHF's decline from 0.9049 resumed by breaking through 0.8942 support and intraday bias remains is back on the downside for retesting 0.8825. Fall from 0.9223 should be in progress with near term channel intact. Break of 0.8825 will target 50% retracement of 0.8332 to 0.9223 at 0.8778 next. For now, risk will stay on the downside as long as 0.9000 resistance holds, in case of recovery.

In the bigger picture, focus remains on 0.9223/9243 resistance zone. Decisive break there would suggest larger bullish trend reversal and turn outlook bullish. Nevertheless, rejection by 0.9223/43 will keep medium term outlook neutral at best, for more range trading between 0.8332/9243 first.

The Consumer Price Index (CPI) fell 0.1% month-on-month (m/m), below the consensus forecast calling for a modest 0.1% gain. On a twelve-month basis, CPI edged lower by 0.3 percentage points to 3.0%.

• Lower energy prices – largely attributed to a 3.7% decline in gasoline prices – helped to push down on the headline measure. Grocery store prices were up 0.2% on the month and are up a subdued 1.6% y/y.

Excluding food and energy, core prices rose a modest 0.1%,  a deceleration from May's already soft 0.16% gain, and considerably below the hotter 0.37% monthly readings averaged through the first three months of the year. The twelve-month change on core slipped by a tenth of a percentage point to 3.3% – the smallest 12-month increase since April 2021.

Core services prices rose by a very subdued 0.1% – its weakest monthly gain since August 2021.  This was the result of a notable deceleration in shelter costs – rising 0.2% after averaging monthly gains of 0.4% over the past twelve-month period – and an outright decline in the 'supercore' measure (-0.2%). Notable declines were seen across transportation – largely driven by a sharp 5% pullback in airfares – and recreational services.

Core goods prices fell by a modest 0.1%, thanks to a further pullback in both new (-0.2%) and used (-1.5%) vehicle prices.

Key Implications

This is exactly what the FOMC is looking for. Not only did the supercore measure slip into deflationary territory, but the long-awaited adjustment lower on shelter prices also appears to be underway, while core goods prices also continued to edge lower. Encouragingly, the three-month annualized rate of change on core inflation fell sharply to 2.1% – the softest reading since March 2021.

Speaking at his semiannual Congressional testimony earlier this week, Chair Powell described the May inflation report as 'very good', which would make this morning's report excellent. Should the next two inflation readings remain on the softer side, a September rate cut looks to be very much in play.

Daily Pivots: (S1) 161.38; (P) 161.59; (R1) 161.93; More...

USD/JPY declines sharply in early US session and breaks 160.25 support decisively. Considering bearish divergence condition in D MACD, fall from 161.49 might already be correcting the whole five-wave rally from 140.25. Intraday bias is back on the downside. Sustained break of 55 D EMA (now at 157.62) will affirm this bearish case. Next target will be 38.2% retracement of 140.25 to 161.94 at 163.65. Meanwhile, rise will now stay on the downside as long as 160.25 support turned resistance holds, in case of recovery.

In the bigger picture, long term up trend is still in progress. Further rise is expected as long as 154.53 support holds. Next target is 100% projection of 127.20 (2023 low) to 151.89 (2023 high) from 140.25 at 164.94. However, sustained break of 154.53 will raise the chance of larger scale correction and target 140.25/151.89 support zone.

Dollar tumbled sharply in early US session following lower-than-expected consumer inflation readings. Headline CPI showed its first month-over-month decline since early 2023, while core CPI annual rate unexpectedly slowed to its lowest level since April 2021. Now, a September Fed rate cut is becoming a realistic possibility. Fed fund futures are quick to react and are pricing in near 90% chance of that. Indeed, Fed policymakers might start to rethink whether there would be one rate cut or two rate cuts this year.

Simultaneously, Yen surged across the board following US CPI data. The scale of Yen's rally against other currencies suggests that Japan might be capitalizing on the current Dollar weakness to intervene and reverse some of Yen's extended depreciations. Japan has been clear about its readiness to intervene at any time of the day. Also, it has record of acting in the markets strategically, and today's US CPI data gives it a golden opportunity to act. Now, focus is on whether Yen's rebound would spiral further higher with other market participants joining in.

Elsewhere in the currency markets, Sterling is currently the second strongest performer. The pound initially led the pack with a rally on stronger-than-expected UK GDP data but has been overshadowed by the ultra-strong Yen. Dollar is the weakest, followed by Canadian Dollar. Other major currencies are finding their positions amid the current high volatility.

Technically, Gold rally from 2293.45 resumed by breaking through 2392.78 resistance. Current development affirms that case that correction from 2449.83 has completed. Further rise is expected as long as 2378.35 minor support holds. Decisive break of 2449.83 will confirm larger up trend resumption.

In Europe, at the time of writings, FTSE is up 0.36%. DAX is up 0.72%. CAC is up 0.86%. UK 10-year yield is down -0.037 at 4.097. Germany 10-year yield down -0.046 at 2.490. Earlier in Asian, Nikkei rose 0.94%. Hong Kong HSI rose 2.06%. China Shanghai SSE rose 1.06%. Singapore Strait Times rose 0.44%. Japan 10-year JGB yield fell -0.0039 to 1.084.

US core CPI slows to 3.3%, lowest since Apr 2021

In June, US CPI fell -0.1% mom, versus expectation of 0.1% mom rise. Core CPI (all items less food and energy) rose 0.1% mom, below expectation of 0.2% mom rise. Energy index fell -2.0% mom while food index rose 0.2% mom.

For the 12-month period, headline CPI slowed from 3.3% yoy to 3.0%yoy, below expectation of 3.1% yoy. Core CPI slowed from 3.4% yoy to 3.3% yoy, below expectation of being unchanged at 3.4% yoy. Core CPI was also the lowest since April 2021. Energy index was up 1.0% yoy while food index was up 2.2% yoy.

US initial jobless claims falls to 222k vs exp 239k

US initial jobless claims fell -17k to 222k in the week ending July 6, below expectation of 239k. Four-week moving average of initial claims fell -4k to 233.5k.

Continuing claims fell -4k to 1852k in the week ending June 29. Four-week moving average of continuing claims rose 10k to 1840k, highest since December 4, 2021.

UK GDP grows 0.4% mom in May, driven by services

UK GDP grew by 0.4% mom in May, surpassing expectations of 0.2% mom increase. The primary driver of this growth was a 0.3% mom rise in services output, which significantly contributed to the overall monthly GDP increase. Additionally, production output grew by 0.2% mom , while construction output saw a substantial jump of 1.9% mom.

On a broader scale, real GDP is estimated to have grown by 0.9% in the three months leading up to May compared to the previous three months ending in February. This growth was predominantly driven by a 1.1% increase in services output. However, production remained stagnant with no growth, and construction output declined by -0.7%.

USD/JPY Mid-Day Outlook

Daily Pivots: (S1) 161.38; (P) 161.59; (R1) 161.93; More...

USD/JPY declines sharply in early US session and breaks 160.25 support decisively. Considering bearish divergence condition in D MACD, fall from 161.49 might already be correcting the whole five-wave rally from 140.25. Intraday bias is back on the downside. Sustained break of 55 D EMA (now at 157.62) will affirm this bearish case. Next target will be 38.2% retracement of 140.25 to 161.94 at 163.65. Meanwhile, rise will now stay on the downside as long as 160.25 support turned resistance holds, in case of recovery.

In the bigger picture, long term up trend is still in progress. Further rise is expected as long as 154.53 support holds. Next target is 100% projection of 127.20 (2023 low) to 151.89 (2023 high) from 140.25 at 164.94. However, sustained break of 154.53 will raise the chance of larger scale correction and target 140.25/151.89 support zone.

Economic Indicators Update