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EUR/GBP Slips Below Psychological Level ahead of UK CPI

H.S. Borji
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EUR/GBP Slips Below Psychological Level ahead of UK CPI

The British pound strengthened against the euro on Monday, as the EURGBP fell below the psychological 80.00 level ahead of a flurry of UK data releases.

The EURGBP declined 0.24 percent to 0.7990, after climbing last week to its highest level since late June. The technical chart shows initial support located at 0.8011 and resistance at 0.8040. The EURUSD has advanced more than 0.4 percent over the past five days, but remains capped below the long-run average of 0.8080. Above the 0.8040 level, the pair is likely to face resistance at 0.8051 and 0.8069.

The pair has been well supported over the past month amid clear indication from the Bank of England that interest rates will remain at record lows for the rest of the year. The BOE was rumoured to be considering a rate hike as early as this year following a series of upbeat reports showing the UK economy was recovering at a faster pace.

Among those reports was a revised forecast from the International Monetary Fund showing the UK economy was on pace to grow 3.2 percent this year. The Bank of England also upgraded its forecast to reflect an annual growth rate of 3.5 percent in 2014.

UK gross domestic product grew 0.8 percent in the second quarter, which translated into an annualized gain of 3.2 percent, official data confirmed last week.

The UK economy is believed to have expanded at a slower rate in the three months through July, according to the National Institute of Economic and Social Research. UK GDP accelerated 0.6 percent over that period, NIESR reported earlier this month.

Europe had no major economic releases scheduled for Monday.

On Tuesday the Office for National Statistics will release a flurry of economic data, including the closely monitored consumer price index. UK consumer prices are forecast to decline 0.2 percent in July, following a 0.2 percent gain the previous month. That translates into an annualized gain of 1.8 percent.

Annual inflation in June rose to 1.9 percent, a five-month high.

The retail price index, a broader inflation measure that includes housing costs, rose to an annual rate of 2.6 percent in June.

Higher inflation would normally boost bets the BOE would consider lifting interest rates sooner than expected. However, stubbornly low earnings growth are keeping those expectations in check. Average UK earnings are growing at less than half the rate of inflation, prompting the BOE to maintain a neutral stance on interest rates for the time being. Furthermore, weak earnings growth is expected to persist into next year, according to the BOE’s latest quarterly inflation report.

Weak earnings growth points to slack in the economy, which provides enough justification for policymakers to keep monetary policy accommodative. However, the minutes of the August Monetary Policy Committee meetings are expected to reveal this week the first split vote on interest rates in more than three years.

At least one member of the MPC is expected to vote against keeping rates at a record low of 0.5 percent.

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