- Political uncertainty prevails, and the threat of a hard Brexit keeps the Pound under pressure.
- EUR/GBP met a low of 0.8957 last week, losing its footing above the psychological 0.90 level.
EUR/GBP shot higher on Monday, recovering the Brexit noise lead spike in the Pound which was correcting a flurry of recent short positioning as markets juggle with the forever changing political landscapes for the EU and Britain. EUR/GBP met a low of 0.8957 last week, losing its footing above the psychological 0.90 level - an area that is a minefield of stops and option barrier protection, indeed, a tough nut to crack and has been totally out of scope in the pre-financial crisis years.
EUR/GBP has only broken 0.90 a dozen or so occasions and has rarely held above it for more than a short spell. In late 2009, it held for more than a month before sellers took over again. However, political uncertainty prevails, and the threat of a hard Brexit keeps the Pound under pressure, skidding along the bottom of the lows vs a basket of currencies, including the euro. If the political turmoil is grave enough, it could imply that EUR/GBP could leave the 0.90 level for dust in the coming months, but, as analysts at Rabobank argued, "that largely depends on whether the next UK Prime Minister has any success in avoiding a no-deal Brexit either on the October 31 deadline or beyond."
GBP to be saved by the Tory remainers?
Meanwhile, according to the IMM Net Speculators’ Positioning as at July 16, 2019, speculators increased their bearish bets against GBP to the highest level so far this year and almost matching the August 2018 high as Boris Johnson is favourite to replace Theresa May as PM, a decision that will take place tomorrow, and he has been vocal of his hard Brexit position if a deal is not arranged in time between the EU and UK. Political uncertainty will weigh on sterling in the coming months - Indeed, it will be a fascinating three and a bit months ahead for the UK.
The latest noise that gave sterling a boost at the open in Asia came from a weekend article that reported the EU was seeking a new deal with the next Prime Minister, something that could be thrashed out in time to prevent a hard Brexit. The weekend press in the UK was also full of further speculation that Tory remainers will do all they can to limit the chances of Mr Johnson leaving the EU without a deal. However, the downside was shortlived in EUR/GBP and bulls stepped in again, with bears giving way on the talks of resignations under Johnson. Chancellor Hammond was saying over the weekend that he will immediately resign if the overwhelming favourite Boris Johnson gets the job - Bulls were taking the cross all the way back to test 0.90 the figure.
EUR/USD will be critical on EUR/GBP rallies
As for the euro side of the cross, expectations are the ECB will be lowering its deposit rate in September and euro shorts are unlikely to be pared back leading up to the event. The market has already unwound a large short position in the euro considering the expectations of a Federal Reserve interest rate cut at the end of this month.
Unless the Fed is considered to be entering a new easing cycle, then the dollar will likely retain the upper hand and thus weigh o the euro. It will not be unusual to see spikes in the cross on the Brexit hysteria, although faded on dollar strength so long as the Fed' is seen as preempting economic headwinds and only easing as an insurance policy against potentially adverse geopolitical developments, such as trade wars. Further to that, the US continues to outperform the Eurozone by a significant margin in terms of GDP growth, and this week's Gross Domestic Produce data will be a near term factor for markets to consider in relation to EUR/USD.
US GDP outlook
"We expect GDP to advance a near-trend 2.0% q/q saar in Q2, down from a strong 3.1% print in Q1. Unlike the prior quarter, we expect consumer spending to be a key engine of growth, rebounding to about 4% after a wobbly start to the year. Business investment, however, continued to slow due to heightened uncertainty while inventories and net exports were likely a drag on growth,"
analysts at TD Securities explained.
While below 0.90, nearby support is the 0.8953 low from the 8th July low. "Failure here will trigger losses to the 0.8911/23.6% retracement and then 0.8826/38.2% retracement. The market stays bid while above the 200-day moving average at 0.8791," analysts at Commerzbank noted.
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