Yesterday, there was very little to tell on the price action in the EUR/GBP cross rate with little eco data coming off of a holiday on Monday. The pair remained in a narrow range roughly between 0.8050/75. The below consensus BRC shop price report and RICS house price balance were ignored.
Uncertainty on the situation in Europe continued to cap any upside in EUR/GBP, but there was no push for a new up leg of sterling against the euro. EUR/GBP continued to change hands within striking distance of the recent lows. The pair closed the day at 0.8049, compared to 0.8061 on Monday evening.
Overnight, the BRC like-for-like retail sales were reported sharply lower. However, as was the case of late, there was hardly any impact on sterling trading. At the moment of writing EUR/GBP is testing the recent lows in the 0.8035 area.
Following on from last week, the Pound declined for a fourth consecutive day against the U.S Dollar on Tuesday, as a report yesterday showed that growth in UK services industries slowed by more than initial forecasts in April, while a separate report from Nationwide confirmed that house prices fell in April. The UK currency slipped back towards pivotal support in the region of 1.6170 against the Dollar, as the services index dropped to 53.3, from 55.3 in March.
The Pound remained broadly unchanged against the Euro and the Australian Dollar, however, as the report showed that growth in services was still well above the line that would indicate contraction. There is speculation that the GDP figures will be revised higher for the first quarter and the data, although not ideal, doesn’t do anything to discourage that.
Later today there are again no important eco data on the agenda the UK. So, trading might be similar to what happened yesterday.
If EUR/USD would break the key 1.2974/55 support, the decline of the euro overall might accelerate and this might also affect EUR/GBP trading. So for now, there is no reason to expect a U-turn in the standing downtrend of EUR/GBP. That said, we are growing a bit nervous on the UK side of the story going into tomorrow’s BoE meeting.
Given the recent data, the case for more QE will still be on the table tomorrow. After recent communication (Minutes) markets would be wrong-footed if the BoE would raise the programme of asset purchases tomorrow and it could raise credibility issues for the BoE. So, our preferred scenario is for the BoE to halt (at least temporary) the programme of asset purchases. However, with the BoE, one never knows.
From a technical point of view, there is no indication of any trend reversal at all. Over the previous weeks, the EUR/GBP cross rate dropped below key support levels at 0.8222 and 0.8142. This week, the pair dropped below the 0.8068 support, opening the way for return action to the 0.77 area. (October 2008 lows). For now, we don’t row against the tide and keep our EUR/GBP short position.
However, as we have the impression that the market is very much positioned long sterling, we put in place stop-loss protection on EUR/GBP shorts to shield our position from the outside risk of further policy stimulation at tomorrow’s BoE meeting or for a market repositioning for whatever reason. EUR/GBP regaining the MTMA (13 d, currently at 0.8126) would be a first indication that the pressure on the cross rate easing. Sustained trading above the 0.8198/8222 area (recent highs) would call off the downside alert.