EUR/USD and GBP/USD Weighed Down by Data

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EUR/USD and GBP/USD Weighed Down by Data

We are seeing a strong reaction in the Euro and Pound after data out of the Eurozone and the UK. While EUR/USD and GBP/USD enjoyed a week or so of reprieve, the reactions to today’s data could be reviving the prevailing downtrends. Let’s take a look at the key data points, which consist of UK inflation and German Investor Sentiment.

UK CPI y/y (Sept): 1.2%
Forecast: 1.4%
Previous: 1.5%
uk inflation

(click to enlarge; source: forexfactory.com)

Inflation continues to slide in the UK, as the CPI fell to an annual inflation rate of 1.2%, the lowest in 5 years, and has been below the 2.0% BoE inflation target for 9 months. This trend will be pushing back the BoE from raising rates early 2015 as planned a couple of months ago. We also saw other components of inflation, the PPI, and RPI fall in October, paving the way for some pound-weakness ahead this week.

German ZEW Economic Sentiment (Oct): -3.6
Forecast: 0.2
Previous: 6.9
german zew economic sentiment

(click to enlarge; source: forexfactory.com)

Investor morale has been falling throughout the year in Germany, falling below 0 in October for the first time since November 2012, almost 2 years ago. It looks like we have entered a negative cycle that can last a couple of years like between 2007-2009 and 2011-2013. The sanction on Russia is a major drag. The ZEW Economic Sentiment for the Eurozone as a whole fell to 4.1, from 14.2, missing forecasts around 7.1. We also got industrial production data for August, coming in at -1.8% on month after seeing 0.9% growth in July. Forecasts called for a reading around -1.5%.

Let’s take a look at the EUR/USD and GBP/USD

EUR/USD 4H Chart 10/14
eurusd 4h chart 10/14

(click to enlarge)

The 4H EUR/USD chart shows a bullish correction from 1.25 to 1.2790 before retreating back to 1.26. Th EUR/USD started the week holding above 1.26 but the weak data today kept it from testing that 1.2790 high. Instead price is now threatening bearish continuation as it tests the 50-period SMA and a rising trendline.

At this point, a break below 1.26, with the 4H RSI falling below 40 will be a strong bearish continuation signal, which would put pressure on the 1.25 low with risk of further downside.

GBP/USD 4H Chart 10/14
gbpusd 4h chart 10/14

(click to enlarge)

The GBP/USD is ahead of the bearish continuation game. After an October correction rally from 1.5950 to 1.6226, cable is ready for further downside. Even before the data point, we saw a clue in a head and shoulder. In a bearish trend, this signals a clearout to the upside, which suggests further downside. The data point simply nudged GBP/USD over the cliff and it is now falling sharply.

Below 1.5950, there is a common support around 1.59, established in late 2013 (Sep through Nov.). There is a spike down to 1.5850, so let’s have a bearish outlook to at least 1.59, and a more aggressive one to 1.5850.

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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.
  • Fan Yang

    It should be noted that if EUR/USD holds above 1.2650 an pops up above 1.27, the short-term upside risk remains with upside to 1.2790-1.28.