EUR/GBP: A mixed pabg of political turmoil and horrible eurozone data, bull's commitments tested

  • EUR/GBP is declining, -0.08%, within a range of 0.8787 and 0.8742 the low and better offered on a techncial basis. 
  • EUR/GBP bottomed at 0.8638 in Jan, climbing to 0.8840 the high last week where it has since been falling from to test commitments of the bulls at 0.8740 ahead of a more important support line at 0.8725.
  • EUR/GBP has been taking its cues from the Brexit blunders as well as sentiment over the European economy and global growth in general. 

The Brexit fatigue remains a risk for the pound which has taken some short term relief in the dollar's fallout within its late Jan recovery from 95.20 in the DXY to a high of 97.36, (today tucked in below the 97 handle and better offered).

Brexit negotiations between the UK and EU will continue to attract headlines now as we approach the end of February. We are expecting a new House of Commons vote before the scheduled for March 29 exit date after Prime Minister Theresa May begged MPs on Tuesday to 'hold their nerve' and give her more time to secure a Brexit deal. But the question is whether she will be able to maintain political support and win concessions from the EU? 

No deal Brexit still on the cards

PM May recently lost a Commons majority when she looked for support in her current time-consuming path tact, looking for concessions from the EU on the backstop - dragging her heels. However, that was a blow for May as EU leaders would likely feel even less inclined to offer her Brexit concessions, without a majority in Parliament supporting her. So, May has to now deliver a deal by February 27; If she can't, Parliament will vote on taking over the Brexit process, likely seeking an extension of negations warning lawmakers that this will be their last chance to avoid a no-deal Brexit.

As we move to the Brexit endgame, several considerations frame the issue on the EU side according to analysts at ING Bank, as follows:

"These include an awareness that there is no clear House of Commons majority for any Brexit option; a conviction that British Prime Minister Theresa May lacks support for a realistic compromise; a suspicion that hardline Brexiteers are running down the clock to the March 29, 2019, deadline for the UK to leave the EU; and growing doubt about the wisdom of a second referendum, popularly known as a “People’s Vote.” The dominant sentiment underlying the EU’s unified position on Brexit now seems to be what it was in the case of Greece: “enough already.”" 

In other news today, seven lawmakers quit the Labour party, which can dramatically change the political math, especially now, when Labour and the governing Conservative Party are both bitterly divided over the way forward on Brexit.

Eurozone outlook should cap the euro's recovery

As for the euro, it penetrated through through the 23.6% Fibo retarcement of the late Jan decline to recent lows. The bulls have since moved on towards a test of the 38.2% Fibo up in the 1.1340s. This is a key resistance level where bulls failed before, likely aligned with a number of stops and sell stop protection considering the currency fundamental sentiment surrounding the eurozone. In fact, EZ data has been nothing short from horrible - Eurozone industrial production growth was at -4.2% y/y in December and retail sales at a paltry 0.8% y/y. A monthly decline of 0.9% in December leaves production in the monetary union 4.2% below that of last year. The most forward-looking indicators are not even pointing at any significant recovery in growth in Q1. However, the dollar markets keep buying the narrative of Fed rate cuts, which is weighing on the greenback, lifting the euro and sterling and making for a mixed outlook for the cross. 

EUR/GBP levels

Analysts at Commerzbank have explained that EUR/GBP slowly inched higher last week:

"It has failed ahead of the 0.8863/84 (55 and 200 day ma). We have minor support at the 0.8745/23 band and this guards the 0.8620/18 lows. Only failure at 0.8620/18 would suggest ongoing weakness to the base of the channel at 0.8541 and potentially the 200 week ma at 0.8365. We have no strong bias. The market is expected to struggle on rallies to the 200-day ma at 0.8863, and only above here allows for a move to the 55-day ma at 0.8884 and this, together with the October 0.8941 high, are expected to contain the topside."

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