EUR/GBP remains supported ahead of Brexit trigger

  • This Wednesday will mark the triggering of Article 50, which begins the formal process of separation between the UK and European Union, otherwise known as Brexit.
  • A full nine months has elapsed since the June 2016 UK referendum that decided the soon-to-be-realized fate of the UK as completely separated from the EU.
  • In the immediate aftermath of that June referendum, the euro surged dramatically against the British pound, and then subsequently following-through with a steady rise until October. From October, EUR/GBP pulled back for the remainder of last year before entering into an intermediate trading range ever since.
  • Much has changed in both the UK and Eurozone during the nine months following the referendum. Most recently, inflation pressures have begun to creep higher, and both the Bank of England and European Central Bank have begun to emanate subtle hints that higher interest rates may soon be in order.
  • Going into Wednesday’s triggering of Article 50, little has been accomplished in terms of producing any concrete trade agreements between the UK and EU. Therefore, although the actual start of Brexit has long been expected and priced-in to markets, the real risk lies in how the detailed process of trade negotiations proceeds after Article 50 is put in place.
  • As in the aftermath of last year’s Brexit referendum, any major concerns, difficulties or impasses with respect to trade/economic agreements between the UK and EU going forward will likely affect the pound more negatively than the euro. This scenario could translate into a significant boost for EUR/GBP.
  • From a technical perspective, EUR/GBP remains in a relatively wide trading range. On a short-term basis, however, the currency pair has just begun to show signs of recovery after having fallen in the past two weeks. This tentative recovery has shown as a bounce off the key 200-day moving average, as well as the slightly lower 50-day moving average.
  • While much of the anticipated pressure on the UK due to Brexit has already been priced-in to the pound in the past several months, the formal triggering of Article 50 on Wednesday could bring concerns about future UK/EU trade relations back to the forefront. In this event, and if sterling takes the brunt of that pressure, EUR/GBP may be boosted into further recovery. The key upside resistance levels to watch for breakouts in this case include a key downtrend resistance line extending back to the October 0.9100-area highs, followed further to the upside by the 0.8800 and 0.9000 resistance levels.

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