Market Commentary: Doomsday has Arrived for the UK and the EU at the Same Time
Yesterday, the EUR/GBP rebound ran into resistance quite soon. The pair hovered in a tight range roughly between 0.7805 and 0.7820 in Asian and early European trading. There were again very few eco data in the UK and EMU PMI data had also no noticeable impact on EUR/GBP trading.
Very poor UK lending for homes purchases were also ignored. After the release, sterling started a gradual comeback against the single currency. Option related activity was mentioned to be the reason for the outperformance of cable over EUR/USD. However, from a technical point of view it was also interesting that EUR/GBP was unable to go beyond Mondayís top.
The storm on global markets calmed down a little bit, even as there was no indication at all that there would be any progress in solving the pending EMU issues (Greece, Spain, institutional defects…) anytime soon. There was a lot of market chatter on Moodyís changing the outlook of the AAA credit rating of Germany, the Netherlands and Luxemburg to negative. However, the damage for the EUR/USD was limited but the EUR/GBP continued to decline.
Whatever the driver, EUR/GBP returned below the 0.7800 mark. UK Gilts also outperformed German bunds in the wake of Moodyís change the outlook on the German AAA rating to negative. EUR/GBP closed the session at 0.7779, compared to 0.7814 on Monday evening.
Today, sterling traders will keep a close eye on the first estimate for the UK Q2 GDP. The consensus expects the UK economy to have declined for the third consecutive quarter. A 0.2% quarterly decline is expected. The outcome of the report will get ample media coverage. However, we donít expect it to be a game changer for trading in EUR/GBP cross rate. Global euro weakness was the key factor for trading of late and this will probably remain the case.
From a technical point of view, the EUR/GBP cross rate was captured in a consolidation pattern following a longstanding sell-off that started in February and ended Mid-May when the pair set a correction low at 0.7950. From there, a rebound/short squeeze kicked in. However, the move had no strong legs and finally, EUR/GBP dropped below the 0.7950 range bottom. This break opened the way to the next high profile support, in the 0.77 area (Oct 2010 lows). Last week, the decline slowed a bit, but the trend remained clearly intact. On Monday there was a technical setback, but it didnít change the global picture.
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