Eurozone economic sentiment deteriorates further

Euro Highlights

Eurozone economic sentiment deteriorates further

EU exit set to dominate news for months

Sterling - Euro (GBPEUR) FX Technical Analysis

There has been a sharp depreciation of the Sterling Euro exchange rate by more than 10% in the past two months. This dominant downtrend continued in February and as a result a new 14th month low was made. The momentum indicators were close to being oversold and after a weaker inflation reading from the Eurozone, the suggestion is once again pointing upwards. A positive divergence has occurred between the momentum indicator and the current exchange which is normally a reliable sign that the rate may be reversing. These indicators can remain oversold and divergence can occur over extended periods of time especially if the pace of the EU exit campaign gathers pace.

Sterling suffered heavy losses as investors have become increasingly concerned about the prospect of the UK leaving the European Union after influential MPs backed a ‘Brexit’. This will be an unprecedented event with many unknowns of what the true effect a ‘Brexit’ would have on the UK economy or whether it would even lead to a full Eurozone fracture. What is clear from what we have experienced so far is the market doesn’t like uncertainty and we experienced that first hand with the Scottish referendum. Sterling is likely to suffer as we draw closer to the referendum as investors are planning for the worst by hedging the downside in Sterling. I am surprised by how much weight investors are giving to the latest ‘Brexit’ talks considering that we are four months away. Especially given the data from the UK has been surprisingly robust as the UK enjoyed an uptick in consumer prices and an inkling of a recovery in the average earnings.

The doves at the Bank of England are beginning to stretch their wing’s as the committee appears to be leaning more to the dovish side as they prepare for this possibility of Britain leaving the EU. Bank of England’s Ian McCafferty the sole advocate for a rate rise has now dropped his call. Governor Carney has reiterated that the Bank of England could provide more stimulus if needed. Whilst MPC member Vilieghe expressed the need for the central bank to consider a rate cut if downside surprises continue. So far the Euro has completely ignored the fundamentals this month and traded purely on short covering flows. This is despite the European stocks falling sharply, peripheral bond yields surging and Greece falling back into a technical recession.

The Eurozone economic sentiment has deteriorated further, as confidence has once again crashed. Consumers became significantly less optimistic about their prospects as financial markets world-wide continued to slide in response to concerns about weaker growth prospects in China and the global economy. This was even evident in the German economy too, as business confidence has also been hit hard by market volatility.

There are no shortages of reasons for the ECB to increase stimulus especially now that Eurozone inflation fell back into negative territory in February. This stance has been underlined by ECB President Mario Draghi who has said “The ECB is ready to do its part" to bolster the Eurozone’s economy as he emphasized the bank's readiness to reconsider its €1.5 trillion stimulus at its next policy meeting on March 10th.

Buyers

The trend is still lower, however there could be light at the end of the tunnel, but this will depend on what is announced from the ECB on the 10th March. We would suggest that you leave a stop loss order below the recent lows of 1.26 for protection and look for a break of the downtrend.

Sellers

With an ECB meeting on the 10th of March we may see an appetite for the Euro waning. So given the momentum looks over stretched, we are cautious for an aggressive rebound if the ECB do announce more stimulus measure. So we would prefer to fade on any dips with a stop above the downtrend resistance level above 1.30 . For the long term sell, we suggest you reduce some of your exposure here, and look to see how the EU referendum pans out.