Sterling and Central Bank Decisions

Jul 5 • Market Commentaries • 2335 Views • No Comments on Sterling and Central Bank Decisions

Yesterday, on US Independence Day with US markets closed the, EUR/GBP trading developed in thin market conditions. The price action was mostly driven by technical considerations. The final services PMI in the EMU was less negative than expected. The UK services PMI dropped to a lower than expected 51.8, but stayed above the 50 boom or bust level.

EUR/USD reached an intermediate top at 0.8047 just before the publication of the UK figure. However, the move was reversed soon.

EUR/GBP made again a temporary spike higher in afternoon trade and filled offers just north of the 0.8050 barrier. This might have been due to an adjustment of positions in cable ahead of the BoE meeting. The move was again reversed as the euro ceded ground across the board at the end of the trading in Europe. EUR/GBP closed the session at 0.8034, almost unchanged from the 0.8036 close on Tuesday.

Today, will be a busy day for EUR/GBP traders as both the BoE and the ECB will decide on monetary policy. Everything looks in place for the BoE to restart the program of asset purchases. Activity data confirm that activity in the UK is slowing. At the same time inflation is at a 2 ½-year low. The MPC was already close to a restart of the program last month with governor King in favor of £50B of asset purchases. So, the debate in the market is whether the BoE will announce £50 or £75B of bond purchases. One remark on the sidelines: of late (e.g. in the hearing before a committee of Parliament), BoE members apparently were aware that the impact of more bond buying on the economy would not be spectacular anymore.

 

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So, other measures (like the plan in cooperation with the government to facilitate lending to the economy) are becoming more important. Nevertheless, in the current context the BoE, cannot ignore market expectations. So, we opt for a £50B additional asset purchases. This should be fairly neutral for sterling. For the ECB, there is also room for a surprise. We don’t rule out that the ECB will take quite bold action. The impact on global markets is not that easy to predict. Nevertheless, we don’t expect that the ECB will bring much support for the euro, even not if the decision would (temporary?) support risky assets. So, we assume that the 0.8100/0.8169 resistance will remain a tough resistance for the EUR/GBP cross rate.

The EUR/GBP cross consolidates 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.

For now we continue to play the range and still slightly prefer to sell EUR/GBP into strength for return action toward the 0.7950 area.

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