EUR/GBP: Two-way business below 0.88 handle, eyes on at 0.8620/18

EUR/GBP has offered good two-way business on Tuesday following balanced headlines on the economic and political front. The cross is taking its cues from the persistent and frustrating uncertainty over Brexit which has become more apparent in recent UK data and surveys.

UK 4Q GDP and December production data highlighted falls in fixed asset formation and broader business investment which will be something for the BoE to take note of. However, they do not meet again until 21st March, a week before the current Article 50/Brexit deadline,

Markets are now weighing up the likely main outcomes of which analysts at Westpac described below, merely to provide an indication of outcome potentials and open to many changes: 

           # A deal around May’s plan (and extended transition): 40-60%
           # Extension of the 29th March deadline: 30-40%
           # Fall into a no deal 10-20%

Meanwhile, there was a moderately dovish message from the BoE put sterling under pressure in the knee-jerk reaction to the decision. We have seen cable spike lower where it is now trading around 1.2850, off the lows of 1.2833 which has left the cross better bid, although broader trading ranges seem likely to prevail until more clarity emerges on the political front. It is also worth keeping an eye on the 10Y gilt yield because a move below 1.15% could drag sterling along for the ride. Meanwhile, UK headline inflation came in a tick below market expectations, at 1.8% y/y, while core inflation held steady at 1.9% y/y. The headline figure, however, was exactly in line with the BoE's week-ago forecast, so should provide no surprises there.

EUR/GBP levels

"Currently the market remains in upside corrective mode and we are unable to rule out gains to .8840/90 where we look for signs of failure. We have minor support at .8723 and this guards the .8620/18 lows. Only failure at .8620/18 would suggest ongoing weakness to the base of the channel at .8545 and potentially the 200 week ma at .8357. The market stays directly offered below the 200 day ma at .8863, and only above here allows for a move to the 55 day ma at .8889 and this, together with the October .8941 high, are expected to contain the topside," analysts at Commerzbank explained.