The EUR/GBP Technically Speaking
This week, trading in the EUR/GBP cross rate developed also in thin market conditions. The intra-day trading pattern was more or less similar to what happened in the EUR/USD headline pair. EUR/GBP reached an intraday top in the 0.8035/40 area. However, the pair was unable to regain Friday’s top. This suggested that the move had no strong legs. So, EUR/GBP turned south and dropped below the 0.8000 big figures when the headlines on Bankia hit the screens. With little news on the agenda, there was a lot of market attention for headlines from BoE’s Broadbent.
On monetary policy the BoE member was not really soft as he reiterated that monetary policy is appropriate and as he questioned the impact of a further rate cut. The BoE member indicated that the fate of the UK economy is closely linked to what happens in Europe. If this is the case, the UK economy will also be hit hard in case Europe would move to some kind of worst case scenario. From a currency point of view, one could raise the question how much upside there is for sterling against the euro in such a scenario. This is an interesting question, but for now, we assume that markets will continue to prefer sterling over the euro as the UK institutional framework is more adapted to address a crisis. EUR/GBP closed the session at 0.7991, compared to 0.7980 on Friday evening.
Today, the UK calendar is thin with only the CBI distributive trades survey scheduled for release. Recently UK eco data were far from inspiring. Another negative surprise might fuel speculation on the need for more QE from the BoE in the near future. This might slow the decline of EUR/GBP, but we doubt that it will change the global downtrend of the euro also against sterling.
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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. This break opened the way for return action to the 0.77 area (October 2008 lows). Two weeks ago, the pair set a correction low at 0.7950. From there, a rebound kicked in/short squeeze kicked in. The pair broke temporary above the MTMA, but the gains could not be sustained. Sustained trading above the 0.8095 area (gap) would call off the downside alert. A first attempt to do so was rejected early last week. A further setback in the 0.7950/0.8100 trading range is favored.
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