EUR/GBP still locked near the 0.71 barrier

Euro heading for the next decisive meeting(s)

On Monday, EUR/USD and USD/JPY opened the session under pressure as the Greek no vote triggered uncertainty on global markets. However, the initial risk-off trade eased soon. Markets apparently concluded that things haven’t become easier, but that chances on a deal were still real. The resignation of Greek Fin Min Varoufakis might have reinforced this hope. So, trading in the EUR/USD and USD/JPY remained volatile, but in the end both cross rates were well off the Asian lows. EUR/USD closed the session at 1.1056 (from 1.1114 on Friday) . USD/JPY ended the session at 122.57 (from 122.79) on Friday. So, after all the changes were limited.

Overnight, Asian equity markets show again a mixed picture. Chinese equities trade again very volatile and with substantial losses. For now the contagion on other Asian markets is limited. We also don’t see a big impact yet on the likes of EUR/USD and/or USD/JPY. The dollar is doing reasonably well. The crash in Chinese equities is still no item for FX trading as it isn”t considered an important factor in Fed policy/global monetary conditions. The Reserve bank of Australia kept its policy rate unchanged at 2.00 %, as expected. The Aussie dollar has declined noticeably against a rising US dollar over the past year though less so against a basket of currencies. The RBA sees further deprecation likely and necessary, particularly given the significant declines in key commodity prices. The Aussie dollar was under heavy pressure of late, amongst other due to uncertainty on China. AUD/USD trades just below the 0.75 level, well within reach of the recent lows.

Today, there are only second tier eco data on the agenda in Europe or the US. So, the focus will again be on the meeting of the Eurogroup and on the Summit of EU leaders scheduled after the close of the European markets.

European policy makers are heading for crucial, potential ‘make-or-break’ talks, but it is very uncertain whether there will be any clarity after the two meetings, a situation global markets are used to. . Germany and the EU have put the ball in the Greek camp and are awaiting constructive proposals. Of late, such context, while highly uncertain, didn’t hurt the euro much. So, more wait-and-see behaviour might be on the cards. We expect EUR/USD to trade sideways in the 1.10 area. Of late, the downside in USD/JPY was well protected in the 122 area. However, we don’t see much upside in the pair as long as global sentiment on risk doesn’t improve in a profound way. In this respect, beside Greece we look to the risk the Chinese equity sell-off might contaminate other markets.

In a longer term perspective, EUR/USD still trades in the 1.0819/1.1467 consolidation range. We maintain a sell on upticks approach for return action lower in this range. We are well aware of the risks of a Grexit and given a higher probability of additional ECB easing, the 1.0819 may be tested in the days/weeks ahead. The 1.1534 February correction top remains our line in the sand to maintain a USD positive bias MT term and this resistance became now much stronger. On the downside, the 1.0819 level (27 May low) is the first high profile reference. A break below that level would open the door for a retest of the 1.0521/1.0458 area. A sell-on-upticks approach around 1.1280 area is preferred. Uncertainty on Greece might continue to cause erratic swings.

EUR/GBP still locked near the 0.71 barrier

In technical trading, the changes in EUR/GBP were modest. As the main EUR/USD cross, EUR/GBP started lower, but without threatening main support at around 0.70. Later on, the euro recouped some losses, but couldn’t hold on. EUR/GBP closed the session at 0.7085, from 0.7138 on Friday. June UK car sales were brisk, but also the EMU Sentix investors’ sentiment unexpectedly improved. None had any impact on trading though. Cable closed the session at 1.56, even slightly higher from the 1.55570 close on Friday. So, after all there was no big impact from Greece on sterling trading.

Today, The UK May production data are expected rather poor (-0.2 M/M for industrial production). Recent evidence from the production side of the economy wasn’t strong, but its negative impact on sterling was limited. We expect a similar reaction today . EUR/GBP needs high profile news (from Europe or from the UK) to move away from the 0.71 pivot.

We had a cautious sell-on-upticks approach and expected EUR/GBP to drift lower in the 0.7483/0.7014 range. Sterling momentum remains constructive, but we turned more cautious on sterling as EUR/GBP neared the range bottom. We keep the working hypothesis that high profile news is needed to push EUR/GBP sustainably below 0.70. The day-to-day EUR/GBP momentum turned neutral last week.