Huw Pill Dovish Speech and EURUSD Outlook.

GBP: The British pound (GBP) is in the spotlight, with the Bank of England’s Chief Economist, Huw Pill, recently making statements that have caught the market’s attention. Pill indicated that UK inflation is likely to experience a sharp decline in the coming months. He also suggested that the current market pricing of interest rate cuts for the next year is not “unreasonable.” This sentiment has resonated with investors, who are now factoring in the possibility of three quarter-point rate cuts in the UK in the upcoming year. This news comes on the heels of the Bank of England’s decision to leave the UK Bank Rate unchanged last week. The central bank faces a challenging economic landscape with above-target inflation and a sluggish economy. The most recent data from S&P Global CIPS Services has shown a concerning trend, with the UK economy declining for the third consecutive month. Additionally, this Friday’s GDP release is expected to indicate a stagnating UK economy, possibly heading toward a technical recession. The yield on the interest rate-sensitive UK 2-year Gilt briefly hit a five-month low, reflecting market expectations for potential rate cuts. While it later rebounded slightly, the yield on the 10-year benchmark is also inching towards a new multi-week low, indicating some uncertainty in the markets. It’s worth noting that UK 2-year government bond yields surged to a high of 5.77% on July 12th, showcasing the shifting economic landscape in the UK.

USD: Turning our attention to the GBP/USD pair, it has recently lost some of its upward momentum, unable to maintain the bullish breakout observed last week. However, this may be a temporary pause rather than a complete reversal of the trend. The outlook for the US dollar (USD) is beginning to take on a more negative tone, as market participants bet that the Federal Reserve is slowly moving away from its previously hawkish stance, influenced by evolving economic conditions in the United States. Considering potential scenarios, if GBP/USD can decisively break through overhead resistance levels ranging from 1.2450 to 1.2460, it could trigger increased buying interest, creating favorable conditions for a rally towards the key ceiling at 1.2591. This level is established by the 50% Fibonacci retracement of the correction observed between July and October. On the flip side, should sellers regain control and push the pair lower, initial support is located around 1.2320/1.2310. It is crucial for the bulls to defend this support zone effectively, as a failure to do so might revive substantial downward pressure, potentially setting the stage for a pullback towards 1.2185. As ongoing weakness persists, the possibility of a retest of October lows becomes increasingly tangible.

EUR: Meanwhile, the euro (EUR) experienced a robust upswing as EUR/USD reached its highest level in nearly two months last week. This surge was fueled by soft US labor market data and cautious commentary from the Federal Reserve Chief. However, the bullish momentum has started to wane over the past few days, with the currency pair retracing some of its recent gains and now challenging support in the 1.0695/1.0670 range. The currency market’s volatility is expected to increase due to numerous risk events scheduled for later this week, including speeches by Federal Reserve Chair Powell and European Central Bank President Lagarde. Considering these potential developments, there are two primary scenarios worth highlighting for EUR/USD. In scenario one, if the currency pair breaks below the support range of 1.0695/1.0670 on daily closing prices, it could intensify selling pressure, potentially paving the way for a challenge of trendline support at 1.0555. A breach of this technical floor could embolden the bears, potentially leading to a test of this year’s lows near 1.0450. Scenario two involves prices rebounding from current levels. If the bullish camp stages a resurgence supported by the horizontal zone at 1.0695/1.0670, we could witness a move towards 1.0765, where the 38.2% Fibonacci retracement of the selloff between July and October acts as a barrier. Clearing this resistance could open the door for further gains, with a potential climb towards 1.0840.

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