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EUR/GBP subdued by policy divergence

H.S. Borji
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EUR/GBP subdued by policy divergence

The euro fell to a fresh 21-month low against the British pound Friday, as the European Central Bank’s latest decision to keep rates at record lows contrasted sharply with policy developments from the Bank of England.

The EURGBP pair tumbled for the fourth consecutive day, declining 0.1 percent to 0.7926. The pair has depreciated nearly 1 percent since June 30.

The trend index is on the bearish side, with initial support likely found at 0.7918. On the upside, the first resistance test comes at 0.7961.

The pair is trading well below the 200-day simple moving average of 0.8276, where it faces a strong sell bias.

In other trading, the EURUSD declined 0.15 percent to 1.3588. The pair faces initial support at 1.3582 and resistance at 1.3652.

The EURJPY declined 0.28 percent to 1.3869. Initial support is likely offered at 1.3858 and resistance at 1.3928.

On Thursday the European Central Bank opted to make no changes to monetary policy, keeping the benchmark lending rate at a record low. The ECB at its June policy meeting slashed interest rates from 0.25 percent to 0.15 percent and became the first major institution to implement a negative deposit rate. This essentially means the ECB will charge banks to hold their reserves.

The ECB hinted at its June meetings that interest rates are likely to remain low for a prolonged period, underscoring concerns about long-term deflation.

Concerns about deflation became reality last October when consumer price growth fell below 1 percent for the first time in four years. The ECB, which targets inflation at just below 2 percent, cut its lending rate in half in November in an effort to combat deflationary pressures. Since then, however, inflation has weakened further, hitting a low of 0.5 percent annually.
Deflation is a dangerous inhibitor of economic growth, and can trigger a cycle of declining consumer spending.

Eurozone consumer prices increased 0.5 percent annually in June, marking the ninth consecutive month inflation was in what ECB President Mario Draghi describes as the “danger zone” of below 1 percent.

In contrast, ongoing developments in the UK economy suggest the Bank of England could be ready to begin normalizing monetary policy sooner rather than later. The BOE, widely expected to become the first major central bank to lift interest rates, will meet on July 10 to discuss monetary policy. According to speculators, the BOE could begin raising interest rates by the end of 2014.

In economic data, German factory orders tumbled 1.7 percent in May, following a gain of 3.4 percent the previous month, the Bundesbank reported today. Compared to May 2013, factory orders were up 5.5 percent.

The Federal Statistical Office will report on German industrial production Monday. Industrial production is forecast to have increased 0.3 percent in May, following a 0.2 percent increase the previous month.

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