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Why I think the EUR/GBP Cross is Important

Autore: FX Empire Analyst - Barry Norman

Why I think the EUR/GBP Cross is Important

Why I think the EUR/GBP Cross is Important

Many traders ask me why I think that the EUR/GBP cross pair is important. I used to look at three crosses before the SNB messed with the Swiss Franc. By using these off pairs, I can get a true sense of the value of the euro. The EUR/USD is too involved with global pressures and economic data that the actual value of the euro gets colored by other factors. By using the EUR/GBP and I used to use the EUR/CHF and the EUR/JPY, I can extrapolate the actual strength or weakness of the euro.

On Monday, trading in the EUR/GBP cross pair followed the broader trend of the single currency. The trend was south, but the losses were fairly limited given the negative news flow and the sell-off on most other markets of risky assets.

The euro came under pressure from the start of trading in Europe and remained under pressure to set an intraday low in the 0.8020 area late in Europe.

However the recent low at 0.8012 stayed out of reach. EUR/GBP closed the session at 0.8029, compared to 0.8065 on Friday evening. 

Today, the market will look out for the monthly UK budget data.

The UK’s budget balance for May will be released, and forecasters polled by Bloomberg are expecting net public sector borrowing of GBP14bn during May. That would put net borrowing at GBP10.7bn for the year compared to GBP31.5bn at the end of May 2011.

The report might cause some intraday swings in case of a deviation from consensus. However, the focus of markets is on monetary policy. In this respect, markets will keep a close eye on a testimony of BoE governor King (and some other members) before the treasury select committee. Of late, any hints on more QE had only a very limited negative impact on the performance of sterling against the single currency. However, just one week ahead of the BoE decision, we would be surprised to see sterling completely ignore a new batch of soft comments from the BoE. The  trend in the EUR/GBP cross rate is down, but the easiest part of the gains of sterling might be over. The 0.8012/00 are has proved to be a tough resistance of late. We maintain our long term EUR/GBP negative bias, but then day-to-day momentum of the downtrend might slow. 

From a technical point of view, the EUR/GBP cross rate consolidates following the sell-off that started in 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 0.8100 area would call off the downside alert and improve the short-term picture. The pair tried several times to regain this area, 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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