The GBP Doesnt Measure Up Against the Euro
On Wednesday, trading in the major sterling cross rates, including in EUR/GBP, was far less animated than was the case over the previous days. Initially, sterling held near the recent highs against the single currency, but there were no additional gains. The UK data were mixed. The BBA loans for home purchases were weaker than expected. On the other hand, CBI reported sales were well above the market consensus. However, both data series failed to inspire trading.
The GBP saw a mixed performance against its major peers despite the release of a stronger than expected CBI (retail sales index). GBP had a much muted reaction following the release, suggesting that market participants are looking through what is expected to have been a one-time upswing that occurred over the course of recent Jubilee celebrations. Retail spending is expected to remain muted over the medium term as Eurozone concerns continue to weigh on households in the UK.
Accordingly, the BoE is expected to announce an increase in asset purchases next Thursday, and markets appear to have priced in this development given the 0.6% decline in GBP since the release of the most recent (dovish) MPC minutes on June 20th
Also on the euro side of the story, traders were reluctant to place big bets ahead of the EU summit. During the afternoon trade, sterling lost some ground even as EUR/USD dropped below the 1.25 mark. In technical trade, EUR/GBP regained the 0.80 mark. EUR/GBP closed the session at 0.8009 compared to 0.7986 on Tuesday evening.
Overnight, EUR/GBP tried to extend yesterday’s gains beyond 0.80. Nationwide House prices surprised on the downside (-0.6% M/M; -1.5% Y/Y). There was no immediate reaction after the data, but EUR/GBP joined the broader euro rebound later in Asian trade this morning. However, at this stage it doesn’t look that the EUR/GBP is building on a strong momentum.
Later today; the final UK Q1 GDP is old news. So, global euro positioning going into the EU summit will also be the name of the game in this cross rate. Will the euro (and thus EUR/GBP) enjoy some kind of a (temporary?) breather? Sterling is holding strong against the euro, but in a short-term perspective, it looks that the downside in this cross rate is a bit exhausted, too.
From a technical point of view, the EUR/GBP cross rate consolidates following a longstanding the sell-off that started in February.
Early May, the key 0.8068 support was cleared. This break opened the way for a potential return action to the 0.77 area (October 2008 lows). Mid May, the pair set a correction low at 0.7950. From there, a rebound/short squeeze kicked in. Continued trading above the 0.8100 area would call off the downside alert and improve the short term picture. The pair tried several times to regain this area, but there were no follow-through gains. Of late, we looked to sell into strength for return action lower in the range. The range bottom is now coming within striking distance. So, we turn a bit more neutral on EUR/GBP shorts short term.
