EUR/GBP Forecast: Slim chance of a rise to 0.7250

The EUR/GBP pair weakened in line with movements outlined in the report titled “EUR/GBP Forecast: Expecting a re‐test of 0.7050”  published on April 17th. 

In this report, I have slightly altered my view in the wake of an increased possibility of Greek deal and rising election uncertainty in the UK. Consequently, there is a slim chance of the pair rising to 0.7250 next week. The pair rose to a high of 0.7182 levels today as the shared currency was buoyed by reports of the diminishing threat of a Greek default.
The German 10-year bond yield rose to a two-week high of 0.176% today, despite a slowdown in the private sector activity in April. Meanwhile, the UK gilt yields weakened slightly due to a weaker-than-expected retail sales. So far the markets have been ignoring the election uncertainty. 

Factors that support a rise to 0.7250 - 

1. GBP comes under election pressure – Currently, the market is underestimating the risk of the UK elections. With Labour and Conservatives in opinion polls, many believe  that Scotland's National Party could play a deciding role in the election. Going into the elections, it appears as if there is a high possibility of a hung parliament, which is likely to weigh over the Pound next week. In 2010, we had seen, the GBP/USD drop 300 pips in run up to elections. On election day it dropped 400 pips and then another 500 pips in the following 2 weeks. A similar action could be seen in the next week, leading to a surprise rebound in the EUR/GBP pair to 0.7250 levels.
2. Greece uncertainty continues to drop – In case, Greece reaches deal with its creditors tomorrow, the can would be kicked down the road, thereby providing temporary relief to the EUR. Moreover, there are reports that EU officials are considering a new deadline for Greece – June 30th. Consequently, the EUR/GBP pair could witness a revival to 0.7250. 

However, the rise may begin in the next week. A renewed selling pressure could be seen tomorrow as - 

1. Sentiment index likely to weaken in Germany: The IFO readings due for release on Friday are likely to show a drop in the expectations index on account of the ongoing Greece issue. The preliminary PMI reports released today showed a slowdown in the private sector activity, which underscored the necessity of the ECB’s QE program. On similar lines, the weak German IFO readings, especially expectations index, would reinforce the need to do more and could lead to a fresh drop in the EUR
2. Yield spread likely could remain in favor of GBP – The German 10-year yield rose to a two-week high, although it still remains well below the benchmark yield in the UK. Being the largest component of the ECB’s QE program,the German yields are likely to remain low. In case the Greece issue worsens, the 10-year yield in Germany would be pushed back below 0.10%. 

Thus, a re-test of 0.7115-0.71 could be seen tomorrow or early part of the next week. However, losses are likely to be restricted around 0.7115-0.71. I expect the pair to re-test 0.7150, if not 0.7115 levels, before making an attempt at 0.7250 levels next week.