BoE Inflation Report Guides the EUR/GBP to a Bullish Breakout

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BoE Inflation Report Guides the EUR/GBP to a Bullish Breakout

The EUR/GBP has been consolidating in a range throughout November as we can see in the 4H chart below. This consolidation ranged roughly between 0.78 and 0.7865. Also, we can see that it followed a bearish swing from October’s high of 0.8046.

EUR/GBP 4H Chart 11/12
Screenshot_111214_072014_AM

(click to enlarge)

Fundamental Factor: BoE Inflation Report:
As we got in to the 11/12 session, the Bank of England reported its quarterly inflation report. The bank lowered its growth and inflation forecast, mainly due to the stagnation in Europe. We have seen inflation drift lower, and recently below 2% annual rate. The bank is now concerned with inflation falling to 1% in the coming months, and is projecting 3 years before it comes back to target. It seems like the market will be pushing back the interest rate hike target to mid-2015, and even that requires some shift from the current growth and inflation trend. (Official release site)

The pound fell after the BoE inflation report, and the EUR/GBP rallied sharply. The 4H chart shows the pair rising sharply after a failure to break below 0.78. It instead broke above 0.7865, breaking out of November’s consolidation range and thus signaling a bullish outlook at least in the short-term toward the 0.7911 pivot, and maybe even higher. if we can confirm the broken range as a price bottom.

Some other bullish signals:
1) Price is now above the cluster of the 200-, 100-, and 50-period SMAs.
2) The RSI broke above 60, showing loss of bearish momentum. If it tags 70, it will show bullish momentum.

Now, if there is a pullback, a hold above 0.7850, forgiving some intra-session break, can confirm the broken range as a price bottom, and signal a stronger bullish outlook, limited to October’s 0.8046 high.

I am being conservative on the bullish outlook because:
1) The prevailing trend is bearish as we can see in the daily chart.
2) No matter how dovish the BoE gets, it will not be more dovish than the ECB. Whereas the BoE is indirectly impacted by Europe’s economy, the ECB has to react directly to the region’s economy.

EUR/GBP Daily Chart 11/12
eurgbp 11/12 4h chart
(click to enlarge)

Key Resistance: 
We can see on the daily chart, that a 0.8045-0.8065 area is a common pivot going back to June. The 200-day SMA also resides in this area. We should expect some resistance here for an attempt at least back to the 0.79 handle if not a bearish continuation to test the 0.7766 low on the year.

A break above 0.8065 then liberates the EUR/GBP from the bearish outlook and signals a bullish reversal against the 2014 downtrend.

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.