Forex Magnum


The EURGBP and the new plans from the Finance Ministry and the BoE

Autore: FX Empire Analyst - Barry Norman

After the quite some wide swings on Tuesday and Wednesday, the EUR/GBP pair had found some kind of equilibrium too. The pair settled yesterday in a sideways trading pattern close to the 0.8100 big figure. There was too little in the way of hard news to push the cross rate away from this pivot. After the close of the European markets, UK Finance Minister Osborne announced a new scheme to support credit availability for the UK economy. At the same time, the BoE will also activate its Extended Collateral Term Repo facility. The BoE governor indicated also that the case of further easing was growing. Sterling lost a few ticks on the announcement, but the impact was very limited. EUR/GBP closed the session at 0.8118, compared to 0.8098 on Wednesday evening. 

The new plans by the UK government, may or may not work but they are being hailed by investors and economists around the globe for taking risk and finding new and creative ways to deal with current economic situation. Unlike the EU which just keeps in head in the sand, Osborne and King have at least come up with a plan of action.

King highlighted that more QE is becoming more likely. This is a particularly smart move, whether or not the Bank does pull the trigger on more QE. This is because it tells the market that the new measures are not a substitute for QE. To do so would risk a sell-off in gilts – something that the market had already started to contemplate in the run-up to the Mansion House speech.

Clearly this is positive news. Quite how positive we will find out as the finer details of the measures emerge. Our hope is that it doesn’t repeat the Eurozone-style announcement where initial euphoria is very quickly wiped out. In stark contrast to continental Europe, the UK government and central bank are acting in unison. Hence despite continued undertones of reluctance on Mervyn King’s part, there must be a greater chance that this scheme succeeds where others have failed.

Today, the UK calendar contains the trade balance figures. In the current environment, we expect any market reaction to this report to be only of intraday significance, at best. It will all be about positioning ahead of the Greek elections. In theory, the prospect for more unconventional policy stimulation should be negative for the sterling. However, in the current environment, this is not a priori the case. The UK still has the luxury to have a central bank that can act in a rather flexible way. It is still far from sure that the policy respects of the BoE will work over time. However, with the market be on the eve of a potential hurricane, this policy flexibility might be seen as an asset. So, short-term we assume that sterling might remain well bid, especially against the single currency. 

From a technical point of view, EUR/GBP cross rate is showing a temporary consolidation after sell-off since February. Early May, the key 0.8068 support was cleared. This break opened the way for a potential return action to the 0.77 area (October 2008 lows). Mid May, the pair set a correction low at 0.7950. From there, a rebound/short squeeze kicked in. Continued trading above the 0.8095 area (gap) would call off the downside alert. A first attempt to do so was rejected last week. The pair tried several times to regain the 0.8100 area early this week, but there were no follow-through gains yet. We still prefer to sell into strength for return action lower in the range


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