EUR/GBP: consolidates Brexit related bearish gap, 0.8720 is key

• EUR/GBP has dropped back into a descending channel en route for a 100% retracement of October’s rally.  
• EUR/GBP is consolidating the recent spike in the pound following Brexit deal sentiment and headlines.  

EUR/GBP had started the week out on a bearish gap following weekend headlines that the UK could be n the brink of a deal with the EU that will see Britain remain in the customs union.  This news was written in The Sunday Times but the PM’s office reiterated that 95% of the deal has been settled but, according to Reuters, added that the Sunday Times’s report was speculative. EUR/GBP fell to 0.8737 and has since stabilised with a high of 0.8772.  

Further headlines have been flowing. The Telegraph has reported today that UK Brexit Secretary Raab has written to PM May demanding the right to pull out of the EU’s Irish backstop after just three months – which is sterling negative as with anything that is likely to appease the Brexiteers within the UK government, taking some of the shine from the pound because it has reportedly “stunned” Irish officials and could delay a Brexit agreement.  

ECB expects a lift in inflation

Then, when we turn to data, Markit/CIPS Services and Composite PMI data weakened more than expected in Oct (52.2 and 52.1 respectively, from 53.9 and 54.1 in Sep), suggesting slowing growth momentum. As for the EZ, the Sentix Investor Confidence slipped to a 2-year low today. Trade concerns are likely weighing on investor sentiment. However, policymakers are liable to focus on domestic conditions, according to analysts at Scotiabank would said that they continue to tighten modestly when opting to end asset purchases next month – “An ECB report today highlighted rising domestic capacity constraints in the Eurozone which it expects to lift inflation.”

EUR/GBP levels

EUR/GBP’s reaction lower last week from cloud resistance at 0.8951/74 has neutralised the immediate outlook according to analysts at Comerzbank:

“Attention has reverted to the 0.8723 /.8697 band which represents the lows from May. We suspect that we will see a small rebound today but this is likely to struggle .8800/37. The .8723 Fibo retracement guards the 8700/.8697 June low. Failure at .8697 would target the .8620 2018 low.”