12.06.201914:08 Forex Analysis & Reviews: EUR/GBP: catch the price on corrective pullbacks

The euro/pound cross-pair rose by almost 500 points in May. Northern dynamics were almost recoilless and was caused primarily by Brexit. Against the background of the British problems, the single currency looks much more attractive, even despite the slowdown in the key economic indicators of the Eurozone (primarily inflation).

But in early June, the EUR/GBP pair slowed its growth and is currently showing a corrective decline. This behavior of the pair is understandable, given the overbought euro and the sluggishness of the "divorce process" of Britain. In my opinion, this situation can be used to open long positions on the price decline: almost all signals of trend indicators suggest that the Northern momentum has not yet exhausted itself.

Thus, on almost all "higher" timeframes (namely from D1 and above), the Ichimoku trend indicator shows a bullish "Line Parade" signal, in which all the indicator lines are under the price chart. Also, the pair is located between the upper and middle line (and on W1 – on the upper) of the Bollinger Bands indicator, which also confirms the upward price vector. A temporary pullback in price yet that does not change the configuration of the trend indicators, so with high probability, we can assume that the North trend in the medium term will be continued.

From the point of view of the foundation, such a scenario is also quite likely. But first of all, we will deal with the reasons for the corrective decline in EUR/GBP to assess the chances of restoring the cross. By and large, the pair is losing ground for two reasons: first, because of Mario Draghi's rhetoric, and second – because of Boris Johnson's rhetoric. Their performances, let's say, "resonated", putting downward pressure on the euro/pound pair. In particular, the head of the ECB said that the countries of Central and Eastern Europe are the most vulnerable to the global trade war. He noted the high dependence of these countries on foreign trade while focusing on the automotive industry.

After these words, the single currency was under certain pressure, despite the fact that it was not the first time when Draghi voiced such thoughts. But in this case, the market has linked these words with the prospects of reducing the interest rate, against the background of recent rumors about this. Draghi himself did not draw such parallels, but his colleague – the head of the Bank of Finland and a member of the ECB Board of Governors Olli Rehn, did it for him. He said that the global trade conflict is unlikely to be completed in the near future, so the European Central Bank is ready to use "any tools" to support the growth of the eurozone economy. He did not specify what it was about, although in this case such clarifications are not required. It is obvious that the regulator, if necessary, will use one of the available tools from the "arsenal" of the ECB: either a reduction in the rate (more likely option) or the resumption of QE (less likely option). Such prospects put the expected pressure on the euro, and together with the pound, it somewhat weakened its position.

But the pound, in turn, strengthened slightly throughout the market after the statement of Boris Johnson that "hard" Brexit is not an end in itself for him. Johnson is still a favorite of the inner-party election race and the main contender for the Premier post, so his comments have a serious impact on the market. He expressed doubt that Britain will leave the Alliance without a deal, as "neither London nor Brussels are not interested in this." He also urged to focus on reaching a compromise, "and not to think constantly about a new delay of Brexit." In general, his rhetoric was quite peaceful (as for him), and this fact supported the British currency.

In addition, the pound did not fully play very good data on the labor market, which were published yesterday. First of all, we are talking about the growth rate of wages: the indicator exceeded the expectations of exports, being in the "green zone". Such dynamics allowed us to say that inflation indicators will also please investors with stronger figures, increasing the probability of a rate increase. By the way, one of the representatives of the Bank of England – Michael Saunders – yesterday confirmed that the regulator intends to tighten monetary policy, "if only Brexit will be soft and painless."

Despite this fundamental picture, the probability of a long-term southern trend resuming is unlikely. All the fundamental factors that push the cross down are quite shaky. On the one hand, some members of the ECB do admit the possibility of a rate cut – but on the other hand, the European Central Bank at its last meeting declared the preservation of a wait-and-see position. Therefore, it is not advisable to talk about reducing the rate in the foreseeable future.

The "peacefulness" of Boris Johnson should also be treated with caution. Although chaotic Brexit is not an end in itself for him, he still plans to change the terms of the deal, while Brussels abandoned such an idea ahead of time. Therefore, the probability of a hard Brexit still persists and will only grow as the last day of October approaches. All this suggests that the EUR/GBP cross pair will continue the northern offensive after a temporary corrective pullback. The first target of the northern movement is 0.9030 – the upper line of the Bollinger Bands indicator on the monthly chart.