A Study of the EUR/GBP

On Thursday the EUR/GBP traders faced a balance of weakness. The euro crisis was omnipresent after the EU Summit in Brussels. EUR/GBP set a correction low at 0.8032 in Asia and hovered in a tight range just above that level early in Europe.

 On Wednesday, the news flow from the UK was also far from sterling supportive. The UK retail sales were much weaker than expected. In addition, the BoE minutes of the May policy meeting kept the door open for more policy stimulation/asset purchases if needed. The report indicated that for several members the decision not to expand the programme of asset purchases was fairly balanced. Later in the session, the CBI industrial orders were also materially weaker than expected. EUR/GBP tried to regain the 0.8050 mark, but overall negative sentiment on the euro capped any upside of the single currency. Late in the session, a new euro selling wave also hit the EUR/GBP cross rate and the pair filled bids in the 0.8000 area. EUR/GBP closed the session at 0.8019, compared to 0.8050 on Tuesday evening. 

On Thursday, the BBA loans were above forecast for home purchases and the details of Q1 GDP were published.  UK GDP was revised lower by one tenth of a percentage point to -0.3% q/q (the initial reading was -0.2% q/q). The revision was principally attributable to weaker construction data than was originally registered in the Q1 report. The latter is an interesting piece of information, but it shouldn’t change the global picture on the UK economy. So, the focus for EUR/GBP trading will in the first place be on the euro side of the story. The lack of any concrete results from the EU Summit will continue to weigh.

EU summit fails to deliver but discusses three key points: 1) Eurobonds, with Germany’s stance that closer economic and fiscal ties must precede Eurobonds. 2) Increasing Euro‐project bonds that could help by providing capital to those who need it and used specifically to finance growth projects. 3) Euro area wide deposit insurance, which would support the banking system and hopefully decrease the potential for bank runs. The next EU summit is scheduled for the end of June.

So, the topside of EUR/GBP might still be difficult. However, for now, the downside in the EUR/GBP cross rate is less easy compared to what is the case for the EUR/USD headline pair, as more negative news from Europe might raise the probability for more BoE asset purchases. We expect a further gradual decline of EUR/GBP.

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