- ECB delivered a broad policy package today but disappointed the market,
- BoE cur rates by 50 basis points yesterday, UK at contagion risk.
- Recessions are looming, EUR/GBP eyes 0.8979 upside measured target.
EUR/GBP has been creeping steadily higher as the euro picks up a safe-haven bid and the Bank of England strips 50 basis points out of UK interest rates, propelling the cross beyond a 61.8% Fibonacci retracement on the 0.89 handle. At the time of writing, EUR/GBP is trading at 0.8872 between 0.8771 and 0.8913.
The central banks have been in focussed as the markets seek support due to the coronavirus spread. At an emergency meeting, the Bank of England MPC unanimously decided to cut Bank rate by 50 basis points to 0.25%. The MPC’s timing ahead of the Budget was a bit of a surprise to markets in what was clear coordination of the Bank’s actions with those of HM Treasury. At the same time, the UK Chancellor announced GBP 30bn in immediate fiscal stimulus that would cushion the impact of the virus. The effort was a great deal more than what was seen by the European Central Bank, (ECB).
While the ECB delivered a broad policy package today, but markets seem to believe that it’s too little, too late and expectations are that the April meeting will add further monetary stimulus, with the ECB roughly doubling the size of the QE “envelope” and maybe cutting the rate on TLTROs even further. An emphasis on fiscal support was also present at the meeting.
“Given the spread of the virus in Euro area we expect that the EU commission should provide supportive fiscal package tomorrow,” analysts at TD Securities explained. “This could add to the steepening move in the EGB curves. We also believe that scale of ECB’s funding should support tighter EUR spreads.”
On guard for recessions
At this juncture, markets are pricing in recessions on both mainland Europa and the UK considering how the spread of the virus is and hat the British economy will have to make sharp adjustments to new trading relationships in a virus-struck and weak global economy. “We have never really bought into the Boris Bounce, and think that the relative increase in the PMI’s was driven by an improvement in ‘soft’ sentiment rather than by a meaningful improvement in ‘hard’ transactions.,” analysts at Rabobank argued. also, for the eurozone, the Gross Domestic Product data showed that growth was confirmed at just 0.1% for the fourth quarter of 2019, indicating the economy grew at the slowest pace possible even before the coronavirus disruptions.
The market has recently completed a base and bulls look to a 0.8979 upside measured target, according to analysts at Commerzbank. “Initial resistance is the 0.8891 25th July low en route to the 0.8979 measured target.”