EUR/GBP aggressive rally capped ahead of key resistance, but sterling could still fall a further 3-4%
|- EUR/GBP is pressing on as sterling continues to crumble with investors adding to an already short position in UK assets following the heightened tensions around the Brexit turmoil.
- EUR/GBP is currently trading at the session highs of 0.8885, up from the day's low of 0.8695.
EUR/GBP rallied hard by just under 180 pips on Thursday, making for one of the biggest session's gains in recent history. The move comes as the U.K. Prime Minister Theresa May’s leadership has been called into question following the Brexit Secretary Dominic Raab cabinet minister Esther McVey resignations less than just 24 hours after she PM May had received the approval of her cabinet for a draft Brexit plan.
This has increased the chances of a leadership challenge and a 'no-deal' Brexit. Subsequently, analysts at ING Bank pointed out that investors can demand a greater risk premium on UK assets, which they say could mean another 3 to 4% fall for sterling. That would then be sending EUR/GBP back towards the 0.91 region - (this makes sense given that sterling positions were shorter than they are now, according to recent futures market data, than they were back at the start of 2017).
What now?
"International investors now have to weigh up the chances of a leadership challenge against the Prime Minister, Theresa May, in addition to the (seemingly declining) chances of the withdrawal deal being approved by UK parliament in December. On the former, the news cycle will be focusing on whether sufficient names are backing a no-confidence vote in May, which could potentially take place in the next few days," the analysts explained.
- The extreme sensitivity of the sterling to Brexit news is not only a function of the currency's ultimate destination depending on whether it gets cabinet approval but on scarce liquidity. It's a very dangerous time to play in the cable,"
warned Joseph Trevisani, Senior Analyst at FXStreet.
EUR/GBP levels
Today's price action has exposed the descending weekly resistance line from the 0.9098 summer highs and a break of 0.8950's opens the 0.8980 76.4% fibo line, (April to Aug rally). However, technical indicators are well into overbought territory and signal a pause in momentum for the meantime. A reversion to 0.8830 pivot could play out on profit-taking as markets wait for further developments.
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