With EUR/GBP heading into a confluence of indicators and meetings, can it break 0.87?

EU summit solution unlikely

We talked last week about the prospects for debt mutualisation and were only hopeful of glacial steps towards any kind of agreement which all sides would be content with. Italian bonds have been under pressure as the idea of ‘coronabonds’ failed to gain traction among EU finance ministers and Italy updated its issuance guidelines for the rest of the year. It is now left to EU leaders to discuss the next steps on the size and funding of the Recovery Fund.

To recap, Italy has always been politically against all aid linked to the ESM. However, if this opens up a new line of support for Italian Government bonds, then PM Conte may move to accept this credit line. Latest reports of the creation of a bad bank also seem unlikely at this stage. The euro has been the weakest major currency this month with the market concerned that the Italian debt overhang remains unresolved. The stakes are growing ever higher.

Sterling factors

Of course, both the EU and the UK have been preoccupied with issues other than Brexit trade agreement talks, which means the risks of a large negative UK trade shock are rising. The UK government has even gone as far as saying that they will deny an extension request from the EU, as the clock ticks ahead of a would-be end to discussions in June. Sterling has also been buffeted by the UK’s sizeable current account deficit, which could weigh again if we see a second wave of the virus.

Material breakthrough?

The EUR/GBP chart is certainly interesting with numerous indicators hovering around current levels. Both the 50-day and 200-day moving average are just above around 0.8740 and this tallies with a significant Fib level from this year’s lows and spike high last month as well. Strong support around 0.87 is providing short-term equilibrium and is now key to the next broader move.

With the coronavirus all-encompassing at present, any positive developments in Brexit trade talks may be far off. In the near-term, there appears to be more scope for GBP gains against the EUR if the debt mutualisation issue again highlights divisions in the eurozone.