British Pound (GBP) Price Outlook: GBP/USD, EUR/GBP Seen Stable After US CPI, ECB
GBP/USD will take its cue from this session’s US inflation figures, while EUR/GBP traders will react to the latest decision by the ECB on Eurozone monetary policy
However, neither will likely break out of its recent relatively narrow trading range even though concerns remain about the latest EU-UK trade spat and a possible delay to the planned full reopening of the UK economy.
GBP/USD WAITS FOR US INFLATION DATA
US consumer price inflation data for May, due at 1230 GMT, will dominate trading in GBP/USD this session, as well as trading in the other major pairs, with economists expecting large increases in both the core and headline numbers
However, the figures are not expected to shift the pair far out of its recent narrow trading range between the June 1 high at 1.4249 and the June 4 low at 1.4083 despite an early test of that support level this session.
GBP/USD PRICE CHART, DAILY TIMEFRAME (MARCH 22 – JUNE 10, 2021)
EUR/GBP LOOKS TO ECB MEETING
As long as the ECB sticks to the script, that should leave EUR/GBP between the May 10 high at 0.8676 and the May 12 low at 0.8560.
As for GBP more generally, there is still scope for the currency to suffer from the EU-UK spat over trade between Great Britain and Northern Ireland – particularly if the EU decides to impose tariffs and quotas on UK goods entering the bloc. A possible delay to the planned lifting of all coronavirus restrictions in the UK on June 21 would also be negative for Sterling.
EUR/GBP PRICE CHART, DAILY TIMEFRAME (FEBRUARY 26 – JUNE 10, 2021)
Fibonacci Confluence on FX Pairs
– As looked at earlier in this module,Fibonacci retracements can help traders to identify possible support/resistance.
– We’ve previously discussed how a trader can use Fibonacci retracements on long-term-charts, and by focusing on multiple major moves traders may be able to glean confluent areas of support/resistance. This can provide multiple reasons for buyers or sellers to defend these key spots on the chart, keeping the door open for reversals or retracements.
Fibonacci is wrapped in mystique, and this makes the story around it that much more interesting. But for applicability in markets, the simple version is that Fibonacci retracement levels offer potential areas for support and/or resistance to develop; and because market participants may use these levels in their analysis and, in turn, because these prices have potential impact for price behavior, this can be an excellent addition to the FX traders repertoire of support and resistance analysis.
Italian mathematician Leonardo Fibonacci is credited with finding the Fibonacci sequence in the 13th century, hence the name ‘Fibonacci’. And while his book Liber Abaci introduced the Fibonacci sequence to the western world, traces can actually be found going back as far as 200 BC in Indian mathematics. The sequence is fairly simple: Two numbers added together produce the next value. So 1+1 = 2, and then 1+2 = 3, and then 2+3 = 5, 5+3 = 8, and so on. The first 22 values of the Fibonacci sequence are printed below:
1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584, 4181, 6765, 10946, 17711
This starts to get interesting once we look at the numbers relationship within the sequence to each other. If we take a value and divide by the preceding value, we will get a number approximately close to 161.8%. So, each number in the sequence is 161.8% greater than the prior value after we get out of the initial portion of the sequence (after the value of 89). This is the Golden Ratio of 161.8%.
17711/10946 = 1.61803
10946/6765 = 1.61803
6765/4181 = 1.61803
What struck Fibonacci almost a thousand years ago and the same thing that amazed a thousand years before that is how widely this ratio, and this sequence can be found in the world around us. In Liber Abaci, Fibonacci used the mating cycle of rabbits as an example, showing how rabbit populations in isolation would grow according to the numerical sequence of 1, 1, 2, 3, 5, 8, 13, etc. But this is just the tip of the iceberg, the number of flower petals will often follow the sequence: Lilies have three petals while buttercups have five, chicory’s have 21 and daisies have 34.
Each petal is placed at .618 per turn in order to allow for maximum sunlight. Tree branches, in the way that trunks split and in the way that branches will grow, display the Fibonacci sequence. Shells, hurricanes – even human faces adhere to the Golden ratio in a geometric spiral pattern.
Right now, you can look down at your right arm to notice that you probably have eight fingers, five on each hand, three bones in each finger,two bones in each one thumb and one thumb on each hand. Oh – and the ratio between your forearm and hand – that probably applies by the Golden ratio, as well.
Applicability to Markets
While the application of Fibonacci in nature keeps many graduate level mathematics students busy, traders have more pressing concerns: Applying the study to financial markets. In its most common form, Fibonacci is the use of the golden ratio in support and resistance analysis. So, plot a significant move, draw a line at 61.8% of that move, and we have an area to watch for a possible retracement to find support. The reciprocal of .618 is .382, so this gives us another value to work with at the 38.2% level.
On the chart below, we’re looking at the lifetime move in EUR/USD, taking the low in the year 2000 up to the high in 2009. We start at the beginning of the move and draw the retracement to the top, and 38.2% of the way-down we can see the retracement at 1.3056. We can also see the 61.8% retracement of this move at 1.1212. Notice how this level helped to set resistance in the pair for 15 out of 30 months after the level came into play in January of 2015. As EUR/USD was dropping like a rock in anticipation of ECB QE coming online in a few short months, we caught support at this level on the way down in January of 2015; but after that we had eight consecutive months of resistance showing at or around this key 61.8% retracement level.
EUR/USD Monthly: 15 of 30 Months with Resistance at 61.8% Retracement, 3 Months of Support
Gold Price Outlook: XAU/USD Eyes Fastest Expected Core Inflation Rate Since 1993
DGold prices weakened despite falling Treasury yields as USD rose All eyes are on US CPI data for 1993-high core price growth rate XAU/USD at risk to near-term pullback, eyes on key rising support
Anti-fiat gold prices aimed cautiously lower over the past 24 hours despite the 10-year Treasury yield closing at its lowest point in over 3 months. The non-interest-bearing yellow metal can benefit when returns in fixed income assets, particularly US government bonds, deteriorate. Weakness in XAU/USD might have been explained by a rising US Dollar during the Wall Street trading session.
A key driver for Treasuries on Wednesday might have been the outcome of the 10-year Treasury auction. There, the bid/cover ratio – which is a gauge of demand – increased to 2.58 from 2.45 prior. That was the highest in almost one year. Increased demand, and rising bond prices, likely resulted in falling yields. The 10-year rate fell to 1.49% from 1.68% prior. That was the smallest since February.
Another way of looking at this is through the lens of fading inflation expectations. The 5-year breakeven rate, which is a view of anticipated inflation by taking the difference nominal rates and real ones, touched its lowest since early March. Gold is often viewed as an anti- inflationary hedge, so weakening price pressures might explain the yellow metal’s consolidative state since late May.
Over the remaining 24 hours, all eyes are on May’s US CPI report. Core inflation, which strips out volatile items like food and energy prices, is expected to clock in at its highest since early 1993. But, it is unclear to the extent a better-than-anticipated result can materially shift the landscape of Fed tapering expectations given ongoing dovish commentary. That may have to wait until after next week’s interest rate decision.
GOLD TECHNICAL ANALYSIS
Gold prices may be vulnerable in the near-term from a technical perspective. A bearish ‘Death Cross’ between the 20- and 50- period Simple Moving Averages offers a downside warning. XAU/USD is seemingly being guided lower by a near-term falling trendline from late May. But, rising support from the end of March is maintaining the dominant upside focus. Clearing the latter may open the door to further losses.
XAU/USD 4-HOUR CHART
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