Central-Banks

The EUR/GBP prepares for the Battle of the Central Banks

Jul 4 • Forex Trading Articles • 1538 Views • No Comments

Yesterday, trading in the EUR/GBP cross rate was confined to a tight sideways trading range around the 0.8020 pivot. Monday’s correction of the euro had halted, but there was no appetite/news to send the single currency higher. The UK data neither provided any clear guidance. Contrary to the manufacturing measure on Monday, the construction PMI came out much weaker than expected at 48.2 from 54.5 (52.9 expected). The May UK lending data were mixed. There is hardly any reaction visible on the EUR/GBP chart and this remained the case further out in the trading session. Later during the day, the euro profited from improving sentiment on risk and this filtered also through in EUR/GBP trading. The pair closed the session near the intraday highs at 0.8036, compared to 0.8015 on Monday. However, from a technical point of view, no important level was hit.

Overnight, the BRC shop prices slid to a 2 ½- year low at 1.1%. There was no reaction of EUR/GBP.

Later today, investors will look out for the June PMI of the services sector, the last important piece of information going into tomorrow’s BoE meeting. The index is expected to show only a moderate decline from 53.3 to 52.9. However, recent PMI’s showed a substantial deviation from consensus.

The key question is whether this report will still be able to change expectations on tomorrow’s BoE policy decision. The Bank of England is clearly prepared to take additional action even as there is some debate on the efficacy of more QE. With a close vote already last month’s meeting and BoE governor King in the minority camp, the preferred scenario is for the BoE to raise the program of asset purchases by £50 bn. We doubt that today’s data will change the BoE assessment. Any extra action would be a surprise and might in theory be a negative for sterling.

 

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However, of late the currency market was very clement on central banks with a more proactive stance to support growth (like of the BoE or the Fed). We doubt that a 25 basis points ECB rate cut (with de facto limited impact on interest rate markets) will change the market attitude. So, there are some different scenarios possible but we doubt that they will change the recent trading dynamics for EUR/GBP. For now we expect the topside in EUR/GBP to remain rather difficult.

Of late, we looked to sell into strength for return action lower in the range. Last week, we turned a bit more neutral on EUR/GBP shorts as the range bottom came within striking distance. 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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