EUR/GBP – Headed Below 88 Cents?

EUR/GBP – Headed Below 88 Cents?

Chart Of The Day

EUR/GBP – Headed Below 88 Cents?

The worst performing currency today was the euro, which fell sharply against all of the major currencies. Chancellor Merkel failed to secure a coalition after weeks of contentious negotiations and the talks collapsed over the weekend when the Free Democrats walked out. Investors interpreted the political uncertainty as euro negative and rightfully so because Merkel could lose power after serving as Chancellor for the past 12 years. As the largest country in the Eurozone however its troubles will have a direct impact on the currency.
The Chancellor has said she would prefer to hold new elections than form a minority government that could face its own set of troubles. Unfortunately calling new elections is a complicated process that will take months. Forming a minority government or convincing the FDP to return the negotiation table won’t be easy either, which is why we believe that Germany’s political troubles could send EUR/USD below 1.17. Meanwhile the only currency that outperformed the greenback today was sterling, which traded purely on the hope that there will be progress on Brexit talks this week. Prime Minister May is expected to officially increase Britain’s divorce payment. There’s been talk that they could double the initially proposed amount in an effort to unlock the talks but nothing official has been announced. The latest reports suggest that May would receive approval to increase her offer to about EUR40 billion. Although this falls short of the EUR60 billion bill and may not end up satisfying the European Union, the announcement could provide another boost to sterling.

Technically, EUR/GBP broke below the 50-day SMA but has found some temporary support at the 20-daySSMA. We don’t think this will last as the pair is likely to extend its losses down to the 200-day SMA at .8780.

EUR/GBP – Still Headed for 88 Cents

Chart Of The Day

eurgbp101317
With the wild swings in EUR/USD came big moves for EUR/GBP on Friday but when the dust settled, sterling outperformed the euro and we think this move will last. The European Central Bank’s monetary policy announcement is less than 2 weeks away. Between now and then, the only thing that investors will be thinking about is whether it will be a hawkish or dovish taper. Based on last week’s mostly better than expected economic reports, the ECB should reduce asset purchases and pave the way for tighter policy. However between Spain’s political troubles (which are no closer to being resolved) and the high level of the exchange rate, ECB officials have stressed that policy will remain extremely accommodative which suggests that their preference for a dovish taper. The longer the market feels that way, the greater the pressure on the euro. In contrast, sterling was this past week’s best performing currency. Now that Prime Minister May’s troubles seem to be fading and the EU’s Chief Negotiator suggested that they could provide the 2 year Brexit transition that she’s been asking for, a soft Brexit and prospects of a year end rate hike have returned to take sterling higher. Next week is an important one for the U.K. because there are a number of key economic reports on the calendar that will play a major role in hardening or weakening the BoE’s case for tightening. Inflation, employment and consumer spending numbers are scheduled for release and we are mostly looking for stronger data that should drive GBP even higher.

On a technical basis, after breaking below the 100-day SMA, EUR/GBP spent the last 24 hours trading firmly below this key support turned resistance level. We now believe that the pair will fall to at least 0.8850, the 20-day SMA and more likely to the first standard deviation Bollinger Band at 0.8800.

NZD/CAD to 88 Cents?

NZD/CAD to 88 Cents?

Chart Of The Day

NZD/CAD to 88 Cents?

NZD/CAD has more room to fall. On a fundamental basis, the New Zealand dollar has recently fallen victim to election uncertainty, lower dairy prices and U.S. dollar strength. These issues will continue to plague the currency after the final votes are counted. The National Party led by Bill English lost 2 seats while the opposition Labour Party led by Jacinda Arden won 1. Both parties need to convince Winston Peters that it is in their interest to form a government which will be a difficult task in the days to come. Peters has said he will make a decision by October 12th but it still not clear whether that will happen. Meanwhile, USD/CAD is losing ground as CAD bulls remain in control. USD/CAD rejected 1.26 on Friday after relatively healthy Canadian data. Although net job growth in Sept was slightly less than anticipated (10K vs. 12K) and the participation rate fell slightly, full time jobs rose at its strongest pace on record. Canada has now experienced its 10th straight month of employment gains and its fastest pace of wage gains in 17 months.

On a technical basis, NZDCAD ended last week at its lows and appears poised for a move down to 88 cents. Gains should be limited by Friday’s high near 0.8950, which is well within our stop limits.

EUR/GBP Aims for 88 Cents

EUR/GBP Aims for 88 Cents

Chart Of The Day

EUR/GBP Aims for 88 Cents

On a fundamental and technical basis, we like buying EUR/GBP. There’s a European Central Bank monetary policy meeting on the calendar this coming week and we expect the central bank to recognize the widespread improvements in the Eurozone economy. The weakness of the euro has gone a long way in supporting the economy and boosting inflation leading ECB member Villeroy to say that growth will be solid in 2017. We believe that this is a view shared by a number of policymakers. According to the last ECB minutes, headline inflation is rising significantly giving the central bank more reasons to consider reducing asset purchases. Any recognition of tapering would be euro positive. Meanwhile UK Prime Minister May’s highly anticipated Brexit speech scheduled for next week. Sterling could come under selling pressure as traders unwind any remaining sterling long positions. Its unclear which way she will swing (hard vs. soft Brexit) and this uncertainty should weigh on the currency. May is expected to lay out her approach to leaving the European Union including her possible plans for immigration and single market access. While she could adopt a softer approach, the mere reminder that Brexit is around the corner should spook investors.

Technically EUR/GBP has broken its 100-day SMA and there’s a 20/50 day moving average cross that signals a stronger rally. The latest gains has also taken the pair above the 61.8% Fibonacci retracement of the 2009 to 2015 decline. As long as EUR/GBP holds above 86 cents, a move above 88 cents is likely. However if it drops below 86, then the pair could tumble to 0.8500.

Is EUR/GBP Headed to 88 Cents?

Chart Of The Day

Is EUR/GBP to 88 Cents?

EUR/GBP is headed much higher. On a fundamental basis, Eurozone data has consistently surprised to the upside thanks in large part to the positive effects of a weaker euro. On Monday, we learned that stronger exports drove trade and current account activity higher and in the coming weeks we expect further improvements in the manufacturing sector. Sterling on the hand faces serious Brexit risks. This morning in a SKY interview PM May stated that UK could not expect to hold on to “bits” of its membership after leaving the EU, seeming to stress the “hard Brexit” line that UK would not compromise on the immigrant issue in return for access to the single market. Meanwhile Scotland’s First Minister Nicola Sturgeon warned the Prime Minister that she was not “bluffing” over the prospect of a second Scottish independence referendum, Scotland voted to stay in the EU and the idea of a “hard Brexit” is clearly unappealing to Ms. Sturgeon’s constituents. The best case scenario for the U.K. economy and sterling would be if the U.K. remains within the single market that allows for tariff free movement of goods, services, money and people within the EU but this scenario is appearing increasingly less likely.

eurgbp011017

Technically, EUR/GBP has broken above its 100-day SMA but there’s quite a bit of resistance right above current levels. This includes the August high near 0.8725, the 61.8% Fibonacci retracement 2008 to 2015 decline and the 23.6% Fibonacci retracement of the 2015 to 2016 rise. It can also be argued that there is a head and shoulders pattern forming. However if EUR/GBP makes and breaks 88 cents, it should be headed for 90 cents and Brexit is significant enough to drive the pair to that level.