EURGBP Analysis (Apr, 2022) Stagflation Inbound?
Most countries across the globe are feeling the fallout from not only the pandemic but the on-going conflict in Ukraine. Annual inflation in Europe alone has risen to 7.5%, a huge number.
Energy prices are one of the major contributors spiking by 44.7% on a year on year basis. Consumers are seeing themselves pay more for their gas and electric but also their fuel for transport. These rocketing prices are having unwanted consequences across all production businesses, factories and households.
That being said Europe has a much larger dependency on Russian oil and gas which has been barred from most countries... meaning many countries across the world have blocked buying from Russia. The UK being one of them.
What we're potentially seeing is a continuation of a bearish outlook on the euro.
Logikfx Technology Summary
The logikfx technology summary page shows at a glance the overall fundamentals of a chosen currency pair by analysing their economic reports and showing bearish or bullish signs.
What we've identified across the board for EUR/GBP is that it's mainly looking bearish, with the GDP differentials being the main conflicting indicator.
The following indicators are showing bearish signs:
Macro currency strength meter
Interest rate differentials
Hedge fund positions
Using this summary we can progress with the analysis with a bearish directional bias, however, we need to discover on a relative basis whether the relative indicators on the trade analysis agree or not.
Macro currency strength meter
The macro currency strength meter is showing potential bearish signs for EUR but also at the same time GBP is heading in a downwards trajectory suggesting both are slowing on a fundamental basis but Europe is slowing at a faster rate.
We can see the latest data shows the past 3 weeks EURGBP has been declining in value which can be confirmed by the downwards price action in the last couple weeks.
The question is whether this trend continues and whether GBP picks up some bullish data or not.
For now we're bearish but it will be important to keep an eye on the currency strength meter to pick up any conflicting signs.
GDP Differentials
If you remember from the technology summary the only contradiction in the analysis was the GDP Differentials.
What we can see from the forecast is that Europe is slowing in total economic output but the UK is slowing at a faster rate. This shows the green differential line peaking above 0 for the first time which is why it's showing bullish signs and against the potential bearish move.
GDP differentials are considered a long term lagging indicator so there's potentially a bullish long-term move in EURGBP but a short term bearish correction coming...
Definitely one to keep an eye on.
Trade Analysis (Imports/Exports)
BP PLC is a British oil and gas company regarded as one of the world's seven oil and gas supermajors.
What we're seeing across the analysis is that BP has a negative correlation to EURGBP. Throughout the past year we've seen EURGBP depreciate in value but for BP Plc prices have seen an upwards trajectory.
Recent price movement shows that the bullish move on BP could signal a bearish sign on EURGBP if the negative correlation holds true as we saw in early January 2022 where BP price rose but EURGBP fell even further.
BP agrees with the bearish directional bias.
Shell plc is a another British oil and gas company headquartered in London, United Kingdom. Oil is surprisingly a big industry in the UK...
What we've seen across SHELL prices is a huge upwards bull trend since late 2021 and early 2022. Prices have seen a spike of over 30% whereas EURGBP fell by just under 2% during that period.
As we see SHELL reach new year on year highs we may see EURGBP fall further breaking the level of support it seems to be congesting between.
Again, it seems the gas and oil industry is signalling a bearish move on EURGBP...
Volkswagen is Europes largest Automotive company.
What we're seeing across the analysis is a positive correlation... as Volkswagen prices fall EURGBP follows and vice versa.
The recent data shows VW on a downwards trend with a recent correction suggesting bears are in complete control.
Overall, the trade analysis agrees with a bearish move on EURGBP.
Interest Rate Differentials
The interest rate differentials were another bearish indicator as currently the European interest rates have a lower interest rate than the UK... The Bank of England is also set to increase rates to help curb inflation which would widen this gap.
Hedge Fund Positions
Hedge funds are huge market players in the currency market, they trade for themselves or for clients on a speculative basis to make money. Traders around the globe whether they're retail traders or not have one goal, to make money and the hedge funds are the most successful at it.
What we're seeing here is the open interest of currency positions for hedge funds.
What the graph is suggesting is currently, the hedge funds are selling more positions in EUR and buying positions in GBP... this has created a negative differential which means we'd be trading with the market sentiment and not against it. A great confirmation indicator.
Price Analysis
The overall price trend for EURGBP has been bearish... the current economic outlook doesn't look great and this trend is potential set to continue and break new lows.
Keep an eye out, one to add to the watch list.
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