EURGBP has risen to a key resistance area, much like the 1.2400+ area in EURUSD. The coming days are a test for both the Euro and sterling, starting with today’s BoE quarterly inflation report.
The UK economy is in the doldrums and is fast becoming an example of how money printing fails to solve what ails a post credit-bubble economy. (Of course, the printers out there will merely argue that the scale of printing should have been even larger). The pound has been relatively resilient of late versus the US dollar because the latter remains a mirror image of risk appetite, which has been so strong of late. But sterling has faded against the Euro on the sudden unwinding of the EU systemic risk trade as measured by the front end of the EU peripheral sovereign yield curve (Spain’s benchmark 2-year yield has come in over 400 basis points over the last couple of weeks from its peak).
From here – two things will drive the EURGBP pair – first and foremost is the EU debt crisis trade, with further signs that the ECB will move in the near term to prevent any further aggravation of the crisis until the politicians have had a chance to make up their mind in coming months and further unwinding of peripheral risk worries a potential driver for a continued squeeze on Euro shorts in the near term, even if we expect that Euro troubles are set to return in September at the latest.
In the UK, the focus will be on the success or failure of the new lending scheme, the latest attempt to get a debt-addled economy moving forward by extending easier credit. But even before that, we have the quarterly inflation report from the BoE up shortly (today at 09:30 GMT), which may indicate the degree to which the BoE is ready to continue to expand its asset purchase programme.
Chart: EURGBP
The pivotal nature of this area just above 0.7900 is rather obvious, with the 55-day moving average also coming into play here. A move higher through this area could be a setup for a further test higher toward 0.8150. This move could be encouraged by a very dovish BoE inflation report today, which would have the market looking for another round of gilt purchases. The pair is only likely to find resistance in the near term if the BoE changes its expected dovish tune, or if the ad hoc EU political or perhaps even Bundesbank statements take the steam out of the near term Euro surge.
John J Hardy,
SAXO BANK