The European Solution From a European Currency Prospective

By FX Empire Analyst - Barry Norman
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At the surprise of traders, and at the end of the week, the month and the quarters, EU Ministers did the unthinkable; they introduced a complete comprehensive plan to solve the EU crisis that was ready to go action within days. The plan caught everyone off guard, but markets were elated, simply that the Ministers realized the seriousness of the situation and acted. All week, market watchers had predicted little in the way of action from the EU Summit. With the news, investor's sentiment turned positive and risk appetite soared.

The EUR/GBP joined the broader "repositioning" in the market. The euro gained across the board after the early morning communiqué from the EU summit. However, as there was a broader risk-on rally, cable profited from global sentiment on risk too. EUR/GBP more or less followed the two-stage rebound of EUR/USD, but the move was far less powerful than was the case in the headline pair. EUR/GBP tested offers in the high 0.80 area, but a real test of the 0.8100 big figure didn’t occur. The pair also didn’t regain any key technical level. EUR/GBP closed the session at 0.8064, compared to 0.8018 on Thursday evening. 

Overnight, EUR/GBP joined the correction of EUR/USD. On the screens there are headlines on a newspaper interview with PM Cameron where he didn’t exclude a referendum on EU membership. This is a flashy theme for the press, but we don’t see it as an issue for markets yet. 

Later today, the focus of EUR/USD traders will still be on the fall-out from the EU summit. However, the UK PMI of the manufacturing sector is interesting, too.

Will last month’s steep decline be confirmed?

A poor figure will reinforce market calls for more Bank of England stimulus later this week. However, of late this had hardly any negative impact on sterling. For now we see more consolidative price action in the 0.7950/0.8100 range. 

From a technical point of view, the EUR/GBP cross rate consolidates following a longstanding sell-off that started in February. Early May, the key 0.8068 support was cleared. This break opened the way for potential return action to the 0.77 area (October 2008 lows). Mid May, the pair set a correction low at 0.7950.

From there, a rebound/short squeeze kicked in. Continued trading above the 0.8100 area would call off the downside alert and improved the short-term picture. The pair tried several times to regain this area, but there were no follow-through gains. Of late, we looked to sell into strength for return action lower in the range. Last week, we turned a bit more neutral on EUR/GBP shorts as the range bottom came within striking distance. For now we continue to play the range a still slightly prefer to sell EUR/GBP into strength for return action toward the 0.7950 area.  

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