How will the UK election impact the EURGBP?

UK election special:
Why this election could be the turning point for the pound and what it may mean for the long-term UK political landscape and its position in the EU.

Technical View: EURGBP

2015 has been the “best of times” for the pound against its mainland neighbour to the South. EURGBP has dropped off a cliff so far this year, collapsing from around 0.7800 at the start of the year to a seven-year low below 0.7200 as of writing. From a technical perspective, the big Q1 drop has actually pushed the pair through the bottom of its six-year bearish channel.

As we go to press, EURGBP is testing the 161.8% Fibonacci extension of the H2 2012 rally around 0.7100, so a near-term pause is definitely possible as the risks of the UK election become more salient (the oversold RSI indicator supports this perspective). In saying that, we do not expect a major long-term reversal in favour of the euro: even if EURGBP manages to break back into its six-year bearish channel, it would still likely find resistance at 0.7425 or 0.7680, the 23.6% or 38.2% Fibonacci retracements of the drop off the 2013 high.

Given the established trend, EURGBP may be the currency pair to play if the UK election results in a pound-bullish outcome (a stable coalition). In that case, EURGBP could break through key psychological support at 0.7000. From a longer-term perspective, there is not much in the way of significant support until down around 0.6600, which marks repeated support in 2004 and 2007, as well as the 78.6% Fibonacci retracement of the entire 2000-2009 rally. It is worth noting that past performance does not guarantee future performance.