Market Overview

Time To Sell The EUR/GBP Rip?

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The single currency has gathered upside traction this Thursday ahead of the all important European Central Bank (ECB) rate decision.

The ECB is widely expected to announce a "lower for longer QE taper" today. As discussed here, the markets have priced-in taper in the second quarter of this year.

So what's driving the EUR higher ahead of the ECB? The markets could be pricing in a hawkish scenario (1,2) as detailed by Kathy Lien from BK Asset Management.  

  • Scenario #1 (Most Likely) - Cut monthly bond buys by 30B and commit to buying bonds to September 2018.  >> Depends on Guidance
  • Scenario #2 (Likely) - Cut monthly bond buys by 30B and commit to buying bonds to June 2018.  >> Mildly Positive EURUSD
  • Scenario #3 (Possible) - Cut monthly bond buys by 20B and commit to buying bonds to June 2018.  >> Negative EURUSD
  • Scenario #4 (Unlikely) - Cut monthly bond buys by 40B and commit to buying bonds to Sept 2018.  >> Positive EURUSD

Scenario 4 is unlikely as the ECB would not want to rock the boat by unwinding stimulus at a faster pace. Furthermore, there is a risk that Italian bond markets may react negatively to an aggressive QE taper or changes in interest rates.

Read -  ECB Meeting: Taper priced in? EUR could drop if Italian yields spike

EUR may gain if the outcome matches scenario 1/2/4, however, a bullish trend reversal is unlikely in the EUR/GBP. The monthly chart below shows bearish price RSI divergence, which is a topping pattern. 

Monthly chart

screen_shot_2017-10-26_at_7.57.05_am.png

  • Only a move above 0.9226 (last month's high) would revive the bull run from the July 2015 low of 0.6931.
  • Only a super-hawkish ECB could yield such a sharp move higher, i.e. only under scenario 4 a move above 0.6931 is likely.

View

The upticks are likely to be short-lived. The daily below shows potential for a drop to 0.7852 (200-day MA).

Daily chart

screen_shot_2017-10-26_at_7.57.24_am.png

Observations

  • Repeated failure to retake the rising trend line
  • The 50-day MA and the 100-day MA have topped out
  • Lower highs established

Only a break above 0.9226 would abort the bearish view on the monthly chart (such a move is likely only under scenario 4).

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: FXStreetEurozone Forex Markets

 

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