EUR/GBP Intermarket: could a correction in U.S. stocks support the cross?

Currently, EUR/GBP is trading at 0.8754, up 0.40% on the day, having posted a daily high at 0.8789 and low at 0.8716.

EUR/GBP has been good two-way business from just below 0.8790 to 0.8708, back to 0.8788 and down to 0.8742. There is mounting political uncertainty with the Dutch elections tomorrow, French polls and Brexit headlines. At the same time, the dollar is under scrutiny with the FOMC's two-day meeting underway today and subsequent announcements due tomorrow. 

U.S stocks correcting ahead of Fed hike? 

The stock market is having a wobble and that could be an early sign that interest rates hikes are problematic for the market, especially as we head towards a lock-in on the debt ceiling - Washington is about to be the next focus and the Trump fiscal spending trade that has fueled this stock market rally could be in for a major correction. The questions are whether this will ultimately boost appetite for the euro again for its funding status and potentially supporting the cross, depending on how UK gilts perform. Therefore, we then need to look at the consequences for the dollar to help us gauge if there could be an exodus from it.

Are rate hikes really bullish for the dollar?

Rate hikes may be not bullish for the dollar after all and the market could perceive the Fed acting 'as too little too late'. If the Fed fulfils its promise to go slowly, that is bullish for gold because inflation is rising faster than the Fed is increasing rates. Even as nominal rates rise, real rates are coming down. 

Rising inflation and falling real rates are usually bearish for the dollar. Higher rates should also be bearish for stocks and as bonds yield more, that is also competition for stocks. Therefor, off-shore investments may look more attractive to investors, especially EM's benefiting from a weaker dollar again, and that usually drives demand for the euro for its funding status. With mounting concerns over the pound, and should the elections prove supportive of the EZ project, the cross could be an attractive play to the upside for the medium to longer term, especially if Trump's fiscal spending plans are shelved.

ECB's 2% target under pressure? 

However, should all of the above play out, it is, of course, worth noting that reflation in the EZ is a real risk as well. The ECB are sounding less dovish and Draghi is almost ignoring the possibility of core inflation shooting higher towards the 2% target, considering that in Germany CPI was over 2% in Feb at 2.2% and in Spain, it registered over 3% for Feb, the highest readings in over four years.  

EUR/GBP levels

EUR/GBP near term outlook remains neutral with a bullish bias. So long as the 0.87 handle holds out, there is scope to tackle the 0.8852 January high. Risk to the downside would come into play on a break below 0.8640/50 and down to the 200-day ma region / early Feb resistance.