Search ForexCrunch
  • EUR/GBP is inching down towards S1 at 0.8721 on the Brexit headlines that have been ‘perceived’ as positive in the whole – The latest of which from EU’s  Barnier, that 80-85% of the Brexit treaty has been agreed.
  • EUR/GBP has been extending the downside since breaking below the key 38.2% Fibo at 0.8916 at the start of this month as green shoots of Brexit hopes arise, lending support of a BoE hike, whereby British politics could be getting back onto a firmer footing, in stark contrast to that of in the EZ – (Italy, Greece et alia).  

However, that 20-15% that is still up in the air may not fully reflect that extent to which would otherwise be something that Irish Foreign Minister Coveney said, that resonated with some of us in the markets, when arguing that November looks ‘more likely’ than October for a Brexit deal, warning that a no deal Brexit would be carnage. That 15-20% part that Barnier has been so vague about is presumably the percentage chance that we still could be looking at a no-deal Brexit, “We need to agree on governance, geographical indications, and above all, on the Irish border”.  

Taking Barnier’s timeline that a deal is within reach by Wednesday, October 17 is probably best taken with a pinch of salt, although there is a lot of detail as to what progress has been made on the 80-85% which is lifting some investor spirits at least where otherwise, the yen is lapping up ground across the board, (USD/JPY making good headway within the descending bear channel and the FX-space risk-barometer now below 80 the figure – GBP/JPY struggles on the bid, reflecting some doubt in Brexit progress still).

Italian / Brussels and a fair warning from the IMF

Elsewhere, EUR/GBP struggles on the Rome/Brussels ‘Clash of the Titans’ saga whereby Italy’s government have dug their heels in over the budget plan and pressure is rising.  While at the same time warning that global financial stability risks are rising with trade tensions, the IMF has also caution Italy not to breach the EU spending rules in the next budget after news that Italy’s finance minister confirmed plans to run a budget deficit of 2.4% of GDP. essentially backing Brussels, the Washington-based lender of last resort is warning Rome to abide by the EU’s financial rulebook. Should the nation not heed such advice, the IMF is hinting that Italy should expect to endure a rebellion by investors that could trigger a debt default.

This fair warning from the IMF comes, of course, is no little than five days before Rome is due to submit its draft budget to the EU commission on the 15th, which will check whether it is in line with EU rules. The government has said it wants to use a spending boost to kickstart investment and consumer spending to fuel growth. However, the IMF’s chief economist, Maurice Obstfeld, said it was important to maintain the confidence of international money markets, especially when the risks of an escalating trade war and a damaging no-deal Brexit were rising – and EUR/GBP is one of the main the proxies to all of this political malaise – Should we continue to see green shoots over Brexit, (Raab could go to Brussels on Monday if deal near), the ongoing crisis that simmers away in Europe, (Turkey and the banking sector included) , could tip the price over the edge at this juncture which has already been picking up steam since topping out at the late August highs.  

EUR/GBP levels

Analysts at Commerzbank noted that EUR/GBP had started to erode the 2017-2018 support line at 0.8767 which leaves attention still on the 8700/.8697 June low (S2):

“Failure here would target the 0.8620 2018 low. Rallies will find initial resistance at 0.8837 200 day ma ahead of 0.8926 the 55 day ma and will now stay offered below here.”

However, on a break of S2, the 100% retracement is located at 0.8621. On a positive Brexit outcome, the summer 2016 lows are located right back down in the late 0.75s.