- EUR/GBP stops triggered below key pivot as markets bet on intense UK fiscal measures
- Both ECB and BoE seen on hold, for now, supporting EUR/GBP downside case.
EUR/GBP broke the 0.8380 pivot today and has sprung a leak all the way down to pierce the 0.83 figure, printing a fresh two-month low at 0.8295. At the time of writing, EUR/GBP is trading at 0.8303 from a high of 0.84 the figure while the options surrounding a new appointee to UK chancellor to replace Sajid Javid has shocked Westminster by quitting in the middle of Boris Johnson's cabinet reshuffle.
Initially, the crisis in the UK's government sent sterling lower. However, as details emerged of what had actually taken place, with No. 10 wanting Javid's to fire his advisers leading to his resignation, on the news of who would be the appointee circulated, Rishi Sunak, a favourite among sterling markets, sterling rallied, setting off an avalanche of sell-stops below the pivot in EUR/GBP.
Markets are looking to the prime minster's newly appointed chancellor to unleash a host of fiscal measures at next month's budget due to the giant Conservative majority which has given Prime Minister Boris Johnson and Rishi Sunak carte blanche for radical reform of taxes and public spending. Changes to tax, pensions, housing and social care are all likely to feature and of which should soften the likelihood of a Bank of England rate cut.
UK budget sentiment to flip back to EU/UK trade negotiation woes?
Meanwhile, however, considering the sudden appointment of Rishi Sunak as chancellor following Sajid Javid's exit, this could force the party to delay the date. This means that it will not be too long before sceptics take control back of the pound over the UK and EU trade negotiations and considering the there is little choice being left on the table for the UK between the free trade agreement – which means friction for goods and services – or trading under WTO – much of the same friction but the addition of tariffs – then uncertainties are set to prevail for UK businesses and that means bad news for GBP bulls. When you take market positioning as well, the path of least resistance is surely to the downside for sterling considering the net long speculative positioning. For the cross, it then becomes a playoff between the BoE and European Central Bank.
A political ECB leaning on governments should do more to boost the economy
In recent trade, we have heard from Philip Lane, the ECB's chief economist, speaking in an interview with Reuters, who has proclaimed that euro ara lower interest rate phase is only temporary. He said we are "...still in the legacy of the crisis..." but added that European economies that could do more in terms of spending should do more. his was much of an echo of the general consensus at the central bank.
Recently, President Christine Lagarde told the European Parliament in Strasbourg that she realizes subzero interest rates and bond purchases can hurt and that governments should do more to boost the economy.
“The longer our accommodative measures remain in place, the greater the risk that side effects will become more pronounced,” she said. “When interest rates are low, fiscal policy can be highly effective: it can support euro area growth momentum, which in turn intensifies price pressures and eventually leads to higher interest rates.”
EUR/GBP levels
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