EUR/GBP: Brexit and BOE and Bears, Oh My!
Matt Weller, CFA, CMT January 22, 2020 10:13 AM
Friday’s UK PMI report has the potential to tip the scales and lead to an explosive move in the pound...
In the wake of a solid UK jobs report yesterday (claimants rose just 14.9k, unemployment steady at 3.8% and average hourly earnings +3.2% annualized) and a better-than-expected CBI Industrial Orders report this morning, the British pound is the day’s strongest major currency.
Of course, for businesses and households, these month-to-month economic reports pale in comparison to the longer-term significance of Brexit, which will be made official at the end of next week. But traders are always forward-looking, the (slight) clarity around the UK’s relationship with the rest of the world is an improvement over the last couple of years debating the prospects, timeline, and form of Brexit. In other words, the UK’s official departure from the European Union next week has already been “priced in” to the market.
While the final shape of the UK’s international trade relationships will obviously have a long-term impact on the pound and UK stocks, the market’s short-term focus has shifted to next week’s Bank of England meeting. So far this week, the market-implied odds an interest rate cut by the BOE have fallen from near 70% to closer to 50%, explaining sterling’s big rally against its major rivals.
With traders essentially evenly split on the BOE’s immediate plans, Friday’s UK PMI report has the potential to tip the scales and lead to an explosive move in the pound. If both the Manufacturing (expected at 48.8 following a 47.5 reading last month) and Services report (expected at 51.1 after a 50.0 print last month) beat expectations, traders could push back any expectation of a BOE rate cut, and the pound could rally sharply. Meanwhile, weak readings on the two reports could essentially cement a BOE rate cut next week, and the pound could in turn unwind this week’s big rally.
When it comes to EUR/GBP, rates have broken down from the tight 0.8460-0.8580 consolidation range and have fallen to test their lowest levels of the year to date near 0.8440. From a technical perspective, there’s potential for more downside toward 0.8400 or even 0.8300 if Friday’s PMI report beats expectations and the BOE refrains from cutting rates.
Source: TradingView, Gain Capital
Given the longer-term bearish structure, the trade on a weak-PMI-BOE-cuts-rates scenario is a bit trickier, though traders could consider selling bounces back toward the mid-0.8500s early next week as a chance to join the established downtrend at a more favorable price in anticipation of a sell-the-rumor-buy-the-news reaction to a BOE rate cut next week.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.