EUR/GBP bulls firmly in charge, despite BoE prospects, Brexit concerns eating up the pound

• Brexit weighs and UK data continues to disappoint - a break above 0.8980 opens the 0.9034 October 2017 high.
• BoE still likely to hike rates 2nd August due to a weaker pound and stronger Q2, despite recent weakness in data and UK inflation reading - (83% priced for +25bps on Aug 2nd).

EUR/GBP  is on the up still on the back of another round of disappointing data and odds of a BoE rate hike diminishing for next month's MPC meeting. EUR/USD is en route towards the 0.8967 highs of 6th March, topping out so far at 0.8942 from a low of 0.8903. 

Cable was offered earlier to 1.2957 and to a 10-month low after retail sales (ex-fuel) dropped 0.6% in June vs the expectations of a 0.1% increase - (Retail sales including fuel fell 0.5% M/M against expectations of a 0.2% increase).

However, analysts at Scotiabank argued that 'the BoE expectations for August are little changed' this morning (83% priced for +25bps on Aug 2) and that 'focus will fall on BoE DG Broadbent’s speech Monday to gauge the depth of policy-makers’ conviction for tighter policy.'

What should be considered is that the BoE is still battling with the sharp drop in the pound after the Brexit referendum in June 2016 which contributed to a sharp rise in inflation and a related harsh drop in real wages. Further declines in the pound are not desirable and could, in fact, be a key into to the BoE's decision to hike rates to stave off inflationary pressures - while June's CPI was a miss, Q2 was overall a better economic performance than Q1). 

Brexit risks open risk to parity in EUR/GBP

Meanwhile, Brexit risks are going to be the main focus, regardless of the BoE's & ECB's rate path. A hard Brexit could really knock the stuffing out of the pound and some analysts are calling for a much weaker pound on such an outcome. 

"Our central view is that GBP/USD will be trading around the 1.29 area on a 12 mth view.  On a hard Brexit, we see risk of a move to 1.12," analysts at Rabobank argue. Considering the likelihood that the dollar's strength can continue, (CNY lower (for the first time since 9 August 2017, the Yuan fixing was set beyond 6.70 driving a flight to the dollar away from EM's), where Fed Chair Powell’s testimony this week told markets that the FOMC has no intention of changing its policy of gradual interest rate hikes “for now”, EUR/USD can move lower also - sending the cross on the way to parity but, perhaps not so abruptly - (0.9799 was the Nov 2008 high).

EUR/GBP levels

The upside is underpinned by the monthly 21-SMA and the 10-D SMA. We have higher highs on the daily sticks and technicals keep the bullish trend on track - daily RSI still have room to go until the cross is reading in overbought conditions and a break above 0.8980 opens the 0.9034 October 2017 high - (0.9799 was the Nov 2008 high). To the downside, the 10, 200 and 21-D SMAs guard 0.8720 triangle lows and the double bottom lows at 0.8697. 0.8620 protects a run towards 0.8526 as being the 78.6% retracement of the move from 2017 on the wide.