Recent sessions have unleashed remarkable volatility upon the EURGBP currency pair, stirred by the unveiling of the latest inflation data from both economies. The UK took the market by surprise, with inflation showing an uptick for the first time in ten months. The year-over-year figure landed at 4%, a slight increase from the previous 3.9%, albeit missing the 3.8% forecast. Contrary to expectations, core inflation held firm at 5.1%, failing to ease to 4.9% as predicted.
These developments led to a scaling back of expectations for imminent rate cuts by the Bank of England. The Pound gained strength, potentially lagging behind other major currencies in its journey toward easing, creating a potential headwind for the currency pair. This dynamic was accentuated by Eurozone inflation, which aligned with consensus. Year-over-year inflation met expectations by rising from 2.4% to 2.9%, while core inflation followed predictions by slowing from 3.6% to 3.4%. The European Central Bank is now perceived as being closer to its first rate cut.
Following this news, the currency pair breached a critical support level, opening up opportunities for traders as we move forward.
Technical
On the 4H chart, the currency pair consolidated in a rectangle pattern between 0.8588 and 0.8616 before the inflation releases, which triggered a breakdown at the lower support. Since then, a retracement occurred, with the pair retesting the breakdown level, potentially setting the price action up for a break and retest setup.
If support-turned-resistance at 0.8588 prevents additional upside from the retracement, a new bearish direction could emerge. Support at 0.8582 could be the first barrier to cross, after which the pair could reach the support level where the initial retracement occurred at 0.8568. This support could be crucial in determining whether a new downtrend could be sustained toward 0.8561 and 0.8556, where a demand zone could hold buyers.
However, if the pair breaches the resistance at 0.8588, it could re-emerge in the sideways rectangle pattern, with the 25-SMA (green line) and 50-SMA (blue line) offering the first resistance at 0.8596 and 0.8599, respectively. Any movement above these levels could signal a bullish shift in momentum, which could bring the prior rectangle resistance at 0.8616 back into the spotlight.
Summary
Immense volatility caused by the inflation releases on Wednesday has triggered a breakdown of the consolidation range between 0.8588 and 0.8616. A retracement has since commenced, and the price action around the 0.8588 level could determine the next directional move for the currency pair.
Sources: Koyfin, Tradingview
Piece written by Tiaan van Aswegen, Trive Financial Market Analyst
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