EUR/GBP: plenty of risk fundamentals simmering away, meets hard resistance

• EUR/GBP has moved up through the 21-hr SMA at 0.8962.
• Currently, EUR/GBP is trading at 0.8960 having posted an overnight high of 0.8973 and a European low of 0.8939.
• A NO DEAL Brexit is becoming ever more likely.
• Turkey contagion risk sentiment seems to have been reduced.
• Markets are concerned that the Italian coalition’s economic policies would result in levels of debt that would prove impossible to sustain.

EUR/GBP has moved up through the 21-hr SMA at 0.8962 and is now taking on the prior support line from 15th August which is an important milestone achieved on the back of momentum and a break there with hourly closes open prospects for 0.8980 and channel highs (Friday closing high was 0.8977).

Currently, EUR/GBP is trading at 0.8960 having posted an overnight high of 0.8973 and a European low of 0.8939.

This move higher in the cross started after a pick-up of volatility towards the end of the prior downtrend and at a time when reports that European officials poured cold water on hopes that Theresa May could negotiate Brexit with other EU leaders in September to break the deadlock over Britain’s departure were kicking in. Brexit continues to simmer away in the background as a risk for the pound, where the odds of a no-deal Brexit have been making the rounds and climbing. 

A NO DEAL Brexit is becoming ever more likely

According to a report from the Institute for Government released this morning, a NO DEAL Brexit is becoming ever more likely. The study, titled Autumn surprises gave some scenarios for the next phase of Brexit and this outlined five possible scenarios that could develop in the run-up to Britain’s scheduled EU departure date in March 2019. However, there were four of those scenarios that concluded with Britain leaving the bloc without a deal. In fact, this Thursday, the UK Government will publish the first in a series of technical notices in preparation of the possibility of a no deal Brexit. 

However, Brexit Secretary, Dominic Raab has said:

“Securing a deal is still by far the most likely outcome, but we want to ensure we clearly set out the steps that people, businesses and public services need to take in the unlikely event that we don’t reach one.”

Meanwhile, the Brexit Secretary will be arriving in Brussels tomorrow after a short summer break in Brexit talks. The negotiations will include discussions on future relationship tomorrow and remaining issues on the withdrawal agreement on Wednesday.

As for fundamentals in the eurozone bloc, Italy has taken back the spotlight. The political and budget consequences are still resonating in European markets and Italy's banking sector is always a worry for the ECB. However, the biggest elephant in the room, a the country's new coalition government is currently working on next year's budget, are the risks of rises in pensions and state benefits, given that Italy already has a significantly high public debt pile as being the second largest in the euro zone, at about 130 percent of gross domestic product (GDP). Markets are concerned that the coalition’s economic policies would result in levels of debt that would prove impossible to sustain.

• ECB: Calls from Italy to prolong the QE programme – Danske Bank

However, for now at least, Turkey contagion risk sentiment seems to have been reduced which is another positive for the euro. (Markets are starting to understand that other EMs don’t tend to share all of the same issues that have lead to the currency and economic crisis in turkey and are therefore not as likely to suffer to such an extent which in turn recovers the lost investor confidence in these markets - for the time being at least - Unfortunately, one cannot guarantee this - The former Bank of England governor, Mervyn King, once said, ‘it rarely makes sense to start a bank run, but it always makes sense to join one. Market behaviour can become irrational. Afterall, the recent depreciation of currencies belonging to, say, South Africa, Argentina, Brazil, India, and Indonesia, among others will likely be problematic when trying to survive tighter US monetary policy - several EM central banks have already been forced to raise rates. Moreover, we are not far off from another round of devaluation in the Lira should Turkey not adopt a conventional monetary policy and raise rates to combat inflation - the next central bank meeting is not until Sept. 13 - so be aware).

EUR/GBP levels

The rising and previously stubborn daily 10-D SMA was well and truly broken, commencing in Friday's price action. TGhe SMA finally giving in to five sessions of probing. Crucially, the price has also pierced the 0.8967 6th March highs and is taking on the aforementioned support turned resistance level. 0.9032 remains as a key target as the October 2017 high - (0.9308 comes as the August 2017 high). To the downside, the 2-month uptrend at 0.8877 guard risk down to the 0.8720 triangle lows, (the 15th June low). Further out, the double bottom lows at 0.8697 are exposed.