EUR/GBP to 90 Cents?

EUR/GBP to 90 Cents?

EUR/GBP to 90 Cents?

Of all the major events this past week, the only one with a lasting impact on the market was the UK election. The “smart strategic move” by Theresa May turned into a nightmare for the Conservative Party and the British pound. Sterling dropped more than 2% on Thursday evening to its weakest level in 6 weeks and the worst may be yet to come. May is putting on a brave face by confirming Brexit talks will begin in 10 days but the country is divided and her Brexit strategy is in tatters. Unfortunately the EU is aware of her defeat and are likely to use it to their advantage. This is bad news for the British pound. Sterling consolidated its losses on Friday but this is strictly a relief rally on the hope for some sort of compromise solution. The government is weakened and the economy is in flux. Recent data hasn’t been terrible but with inflation at a 3 year high and wages falling the U.K. is headed for trouble. Foreign investment and net migration will fall in the coming months/years negatively affecting tax revenues and growth. Next week is a busy one for the U.K. with inflation, consumer spending and retail sales scheduled for release along with a Bank of England monetary policy announcement. However politics could overshadow economics as no changes are expected from the central bank and that means sterling should fall further.

We like selling GBP vs. EUR because the Eurozone economy is doing quite well. This past week the ECB upgraded their GDP forecasts, altered their risk assessment and dropped the word “lower rates” from their forward guidance. The latest economic reports were also better than expected with first quarter GDP revised up to 0.6% from 0.5%. Next week’s ZEW survey is likely be strong as well as investors respond positively to the data.

Technically, EUR/GBP is in an uptrend and the next stop above 88 cents is 90 cents. As long as EUR/GBP holds above -.8550, the uptrend is intact. If it breaks below it the trend will have reversed with further losses likely.

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