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.
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.
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.
The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients. Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.