EUR/GBP drops hard to a fresh low of 0.8569, building case to 0.8541

• EUR/GBP is trading at 0.8580 and between a high of 0.8670 and a low of 0.8569.
• The cross is subjected to Brexit headlines which are mounting towards an extension of Article 50, supporting the pound for the tie being.  

Sterling has appreciated against G10 currencies and was reaching a 1-month high vs the euro and dollar as the UK government has been tipped to rule out a no-deal Brexit and delay Article 50’s official 29 March Brexit deadline, (to allow more time to find a deal that the UK parliament can get behind,) raising the likelihood of the Labour party requesting a second referendum, (although the backing of such a scenario is very low at this point).  

“Our central view remains that the UK will eventually see a soft Brexit,” analysts at Rabobank explained. “If by the end of this week the UK remains on course for a hard Brexit we would expect fear to have started to eat away at GBP’s resolve.  While our central projection is for EUR/GBP to be positioned in the 0.86-85 area on a 3 to 6 month view, on a hard Brexit will see the potential for a move towards EUR/GBP1.00.”

How long with  extension last?

When it comes to an extension, this is where the trade in sterling becomes more interesting as there’s a big question over how long it might last. Analysts at ING Bank argued that a shorter extension might have short-term political and practical advantages, but said it would likely be more damaging for the economy and could easily write off a Bank of England rate hike until much later in the year or beyond.

“A longer extension, while potentially more politically awkward for the UK government, could see growth recover a touch in the near-term as the imminent ‘no deal’ threat recedes,” the analysts explained.

EUR/GBP levels

“Our negative bias remains entrenched”, analysts at Commerzbank put out:

“EUR/GBP has recently failed ahead of the 0.8855/60 (55 and 200 day ma). Minor support has been eroded…would suggest an ongoing weakness to the base of the channel at 0.8541 and potentially the 200 week ma at 0.8371. It is on the defensive.”