EURGBP Moves- From Spicy To Hot

EUR/GBP Moves From Spicy To Hot

Apr 19 • Market Commentaries • 2183 Views • Comments Off on EUR/GBP Moves From Spicy To Hot

Today’s eco calendar in Europe is near empty, but the US one is more interesting. Initial claims are expected to have dropped following last week’s surprise sharp rise. The week under review is the post-Easter week, which might again lead to distorted results. Tentatively, we put the risks on the upside of expectations, while the risks for the Philly Fed index are for a weaker outcome If confirmed, this might affect the pair.

More important might be the Spanish auction, which we think, should go smoothly. This might bolster euro sentiment (as might weaker US data), but only in a short term perspective. It would turn the euro sentiment towards bullish.

Markets will fear that the FOMC meeting next week might show the FOMC being slightly more with risk that also EUR/USD breaks below key support. Also the upcoming IMF meeting with discussions centred on extra contributions (firepower IMF) is a euro risk factor.

Therefore, eventual euro gains today should be small and insignificant in a longer term perspective. A disastrous Spanish bond auction, not our favorite scenario, might trigger substantial euro selling. But it did not, the bond auction was successful though yields skyrocketed, the markets had virtually no reaction. It could be rated neutral. Gold, the USD and Euro hardly moved a pip.

Today, the UK eco calendar is empty while the EMU consumer confidence is the sole release in euro land. The US eco data (see bond section) are more enticing, while the Spanish bond auction will be closely scrutinized. We think the latter won’t disappoint (small amount, local support?). The UK IL bond auction will be less important. So, we think that the general euro sentiment will determine the fate of EUR/GBP.

Sterling was the eye-catching currency in the FX market, as the EUR/GBP pair dropped below the 0.8220 key support level. Against the US dollar, sterling rose above the 1.60 level by the end of trading. The trigger was the Minutes of the BoE April meeting. The latter showed that BoE dove Posen no longer asked for an additional £25B QE package, leaving BoE governor Miles as the only governor with such a demand.

 

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On top of it, while the Minutes indicated that growth risks disappointing, it was inflation that drew the attention. Governors were more worried about an overshoot of the inflation target in the relevant time frame. So, the decreased risk of more QE led to heavy sterling buying which resulted in a break lower. A better labor market report might have added to sterling optimism. As the chart shows, the EUR/GBP decline was fast and soon sideways trading kicked in albeit at substantially lower levels.

EUR/GBP closed at 0.8183 versus a 0.8243 close on Tuesday. The pair trades currently slightly lower at 0.8143.  . Of course, after the technical break, it is important to verify whether investors belief in it. So, a fast reversal of EUR/GBP toward the previous range, which is not our scenario, would be a disappointment for the sterling bulls.  Of late, we held the working hypothesis that a high profile event is needed to clear important support. The Minutes might have been such an event, pushing EUR/GBP out of the previous range.

Of course, several other key support levels are lining up like 0.8143, the August 2010 low and 0.8068 the June 2010 low. It could take time for EUR/GBP to break clearly below these high profile levels. Nevertheless, we are encouraged by yesterday’s move higher of sterling and thus keep our EUR/GBP shorts. We will now see whether the break is confirmed and will in the next days consider while we still upgrade our bullish sterling attitude.

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