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  • EUR/GBP consolidates the recovery in sterling, price trapped below the rising channel.
  • EUR/GBP bears n control below 200-D SMA, eyes towards 0.8620.

EUR/GBP has moved into a consolidation as the pressure on sterling finally eases off after the opening slide that started out in Asia from 1.3473 to 1.3390 (London lows). There was a late afternoon bid in London that sent sterling higher to 1.3438 in early NY trade. Currently, the cross is trading at 0.8767, with a high of 0.8774 and a low of 0.8725.

  • US Tsy Sec. Mnuchin: meaningful progress was made in the latest China trade talks

Markets are repositioning and most of that activity is being traded through the dollar, starting out heavily bid to 94.05 highs (DXY) where US  10 year yields topped at 3.08%. US stocks rallied to a two-month high  and gold dropped to a fresh 2018 low, all of which comes on the heels of Mnuchin saying on the weekend that the China trade clash is ‘on hold’.

European Fundamentals at play

The risk-on sentiment helped European shares mostly higher while major markets in France, Germany, and Switzerland were closed. The key focus is Italy and the implications for what the populist coalition means for markets, Italy and the eurozone in the near and longer term – (The third largest European economy’s proposed coalition government promised a mix of far-right, anti-establishment and eurosceptic policies).  

While there has been some relief of an M5S-League accord after months of political deadlock and the subsequent prospects of returning to the polls, their costly and eurosceptic government programme  has since knocked investor confidence and the 170 point difference in yield between Italian and German ten-year government bonds has gained 40 points in less than a week. EUR/USD subsequently lost the 1.18 handle in the closing session last week and has made a fresh low opening this week down at 1.1716, (dollar gaining/trade war relief).

  • Italian politics chaos benefitting USD? – Rabobank
  • Italy’s MIB pared losses down 0.1%.

As far as fundamentals for sterling go, interest rate hike expectations and economic performance have gone into reverse of late, equating to a bullish channel in the cross from mid-April business flows down at 0.8620 to 0.8840 early May highs.  

Analysts at Scotiabank note:

“A majority of economists (60%) expect the BoE to tighten rates in August, according to Bloomberg’s latest UK survey of forecasters. Markets remain a little more circumspect, however, and are pricing in only 50% probability of a 25bps hike later in the summer.”  

For the week ahead, the analysts at Scotibank argued that the UK’s CPI data may be a “make or break” issue for the near-term policy outlook and a negative GBP reaction is easy to envisage in the event of a downside miss for Apr CPI relative to forecasts of a 2.5% rise Y/Y (unchanged from Mar’s outcome).

EUR/GBP levels

EUR/GBP’s 200-D SMA at 0.8865 leaves the bias negative towards 0.8526, the 78.6% retracement of the move from 2017. The 0.8689/87 December and January lows are first targets ahead of 0.8620 April low and a support line at 0.8566. On the flipside, 0.8960 guards 0.9010.