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EUR/GBP: bears looking for a break lower within descending channel, 200-DMA eyed

 

  • EUR/GBP is a loaded pair full of political uncertainty and the price action is volatile.
  • However, the cross is within a clear downtrend channel that commenced back on the 21st Sep and  there  arguments for upside in the pound should the Brexit angst calm in due course if and when  a compromise can be found between the UK and the EU ahead of Brexit.

EUR/GBP is currently trading at 0.8895 and oscillating around channel resistance with a high, (at 0.8914), that was trading a touch below the 200-hr SMA up at 0.8917. The low today has been 0.8866. While Brexit is a risk, so too  is  Italy. As analysts at Scotiabank noted,  Italy continues to pull the EUR around by the nose ring – Scotiabank

However,  Joseph Trevisani, Senior Analyst at FXStreet argues that,  for the EU, “the challenge is not the Italian deficit, several nations have run such in the past, but the existence of a populist opponent to its collective policies and outlook – Compared to Italy, Brexit is a distraction.”

Indeed, the populist movement was a risk that was illuminated back in April 2017 when we discussed the outlook for the French elections and at that time, there were around 40$ of voters  willing to vote for advocates  who were considering or advocating to leave the EU and the euro – it would appear that this sentiment in many nations of the EU has not decamped and remains as a key threat to which leaves the European project is still very much on tender hooks. While there has been an asserted effort and a pushback by the elitist,  

the economic dislocation and inequality caused by globalization remain and the Italian movement is a sign that populism is here to stay, (underpinned  by the US’s selection of President Trump).

Brexit pressures risk undermining the GBP in the near-term – Scotiabank

Meanwhile, however, the euro is attempting to  stablise  on the 1.15 handle although it remains in the hands of the bears while trading below the pivot and 1.16 handle. The pound, on the other hand, is closer to a neutral point on the charts despite the recent sell-off to the 50% retracement point of the August  rally. On positive Brexit headlines, the pair could find its self quite quickly back on the offence  given  the recent run of positive UK data that might have otherwise forced the BoE to raise rates if it weren’t for so much uncertainty around Brexit negotiations and the outlook for the economy one way or the other.  

Hope for sterling bulls

Analysts at Rabobank pointed out that, yesterday, there was a short-lived but sharp reaction in the pound to a headline that PM May was preparing to make a significant compromise to the EU regarding  to  N. Ireland border issue in an attempt to sooth the path for a deal:  

“UK Brexit Secretary Raab later brushed off the news as speculation but the headline will still likely encourage speculation that the UK could remain in the customs union, albeit  temporarily,  until an alternative solution is found.   Given that Labour supports a customs union and so do some Tories, there is the possibility that May could find sufficient parliamentary support for such a plan.   Given that it would clear away some of the  currently  political uncertainty, such an outcome would be positive for the pound.”

In the Brexit stormed UK, political uncertainty overweighs any positive macro news

Today, there have been a number of headlines:

EUR/GBP levels

Bears eye the August and current September lows as well as the May high and 200-day moving average at 0.8855/39. If  cable were to find a bid on optimism or a break down in dollar strength again,   the5 month uptrend at 0.8863 could be seen in days to come. “Ideally this together with the 200-day ma at 0.8839 will hold the downside and provoke recovery, ” analysts at Commerzbank argued, adding, “We should then see a rally to the 0.9011 level and the August high at 0.9031. Above 0.9011/31 sits the 0.9101 August high. Above there would target the 0.9161 Fibonacci resistance and then the 0.9291 2009-2018 downtrend line.”

 

 

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