Photo - Andreas Zanin
Andreas Zanin
Analysis | May 18, 2021

KTM FX Weekly: Eye on the UK and EA inflation

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The common currency regained downward momentum against the pound over the past three weeks after traced out a triple top pattern on the weekly chart. We expect downward momentum to remain in place in the week ahead during the absence of Euro catalysts.

 

The heavy calendar of data releases still on tap this week for the U.K. The heavy U.K. data releases spread over this week, whereas Euro releases fall on Friday. 

 

GDP:

Last week’s UK GDP number was broadly in line with analyst and National Institute of Economic and Social Research (NIESR) forecast. NIESR now forecasts month-on-month growth of 2 percent in April and an increase of 4.7 percent in the second quarter compared with the previous quarter. And year-on-year growth of 5.7 percent, driven by solid consumer spending, as per the NIESR monthly GDP tracker. 

 

Several countries have published first estimates of GDP for Quarter 1 2021, including the United States, Germany, France, Italy, and Spain. The below chart shows that the real GDP is estimated to have increased by 1.6% in the U.S. and 0.4% in France in Quarter 1 2021, while there were contractions in real GDP in Germany, Spain, and Italy Quarter 1 2021.

U.K. 1Q GDP number was slightly better than expected.

U.K. gross domestic product is estimated to have decreased by 1.5% in Quarter 1 (Jan to Mar) 2021, according to the ONS latest report. The level of GDP is now 8.7% below where it was before the pandemic at Quarter 4 (Oct to Dec) 2019. The month-on-month GDP was 2.1% in March, reflecting the re-opening of schools, the expanded testing and vaccination program, and rapid growth in the construction sector.

Industrial and Manufacturing production numbers printed on the more vital note. I.P. grew by 1.8% between February 2021 and March 2021 but remained 1.8% below its February 2020 level. The 2.1% rise in manufacturing over the month was driven by higher output in 10 of the 13 manufacturing subsectors. 

 

CPI:

Looking ahead, we will get the Average earnings index (Tue), CPI YoY (Wed), and April Retail sales (Fri) for April, and Flash Manufacturing PMI (Fri). Inflation for U.K. and E.A. is the catalyst this week. As oil prices continue to creep higher, we expect inflation numbers from U.K. and E.A. should propel forward. 

“The inflation rate in the U.K. is expected to reach 1.4% y/y in April while it should speed up to 1.7% for the eurozone,” according to Moody’s Analytics. 

 

TECHNICAL OVERVIEW

In continuation not last week’s article, the triple top pattern on the weekly chart sent the EURGBP lower and printed the first three-weekly decelerating trend for the 1st time since February. Any decisive breakout above 0.8720 levels may cause strength towards 0.8860. Until such time, wait for support levels. 

The cross is now approaching its three-week support levels at 0.8580, followed by 0.8530, its February low. Any violation of the 0.8470 level may cause a clean slide towards 0.8400 and 0.8300 levels.

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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