On Wednesday, trading in the EUR/GBP cross rate mostly joined the intraday trading pattern of the headline EUR/USD pair. EUR/GBP hovered near the 0.81 area during the morning session. The pair tumbled going into the ECB policy decision and early in the press conference, reaching an intraday low at 0.8051.
So, the lack of policy stimulation of the ECB was seen as a negative, rather than a positive also for the euro against sterling. However, the decline was soon reversed (as was the case for EUR/USD). Once again, it is not that evident to see why the euro should gain against sterling due to an overall improvement in sentiment on risk. Hope on a plan to support the Spanish banking sector is probably the best explanation.
Whatever the reason, EUR/GBP closed the session even with a small gain at 0.8119, compared to 0.8095 on Tuesday. So, the battle to regain the 0.8100 neckline continues overnight, the BRC retail sales were slightly better than expected (after a very poor figure last month). The impact on sterling trading was limited. Later today, the Halifax house prices and the Services PMI will be published. A further decline in the PMI might raise speculation on the need for more BoE action. A restart of the BoE programme of asset purchases looks only a matter of timing. Usually, the BoE is not afraid of a voluntary approach. However, it would be a bit strange for King and cohorts to change course again, only one month after they concluded that the UK economy was strong enough to suspend the programme. So, we still prefer a scenario of the BoE waiting a little longer, but it will be a close call. In case of an unchanged decision, this might be slightly supportive for sterling.
However, if the analysis is correct that it will only be a matter of time for the BoE to step back in the market, the reaction of sterling should be limited. From a technical point of view, the EUR/GBP cross rate is showing tentative signs that the decline is slowing. Early May, the key 0.8068 support was cleared.
[Banner name=”Right Trading Tools”]
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. The pair broke temporary above the MTMA, but at first gains could not be sustained. Continued trading above the 0.8095 area (gap) would call off the downside alert. A first attempt to do so was rejected two weeks ago and the pair returned lower in the range, but the 0.7950 range bottom stayed intact. On Friday, the pair returned to the range top and 0.8100 area was regained on Monday. This break improved the short-term picture in this cross rate. The targets of the DB formation are seen at 0.8233 and 0.8254. So, the correction might still have some further to go. We look to sell into strength, but are in no hurry yet to add to EUR/GBP short exposure already at this stage.
