Downside risk for EURGBP

- An important date to mark in your diary is March 4. On that day there is a general election in Italy.

-On the same day, the result should be known of a vote by members of Germany’s SPD on whether to join a grand coalition with Chancellor Merkel’s conservatives.

- The ‘wrong’ result in either or both could weaken EURGBP.

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Go Short EURGBP

A date to mark in your diary is March 4. On that day there is a general election in Italy and leading in the opinion polls is the anti-establishment Five Star Movement, which is broadly Eurosceptic. The right-wing Northern League is Eurosceptic too, so if either party becomes part of the coalition government that seems likely once the votes are in, the Euro could suffer.

On the same day, the result should be known of a vote by members of Germany’s center-left Social Democratic Party on whether to join a grand coalition with Chancellor Angela Merkel’s conservatives. If they agree, Germany will finally have a new government. However, if they disagree, then either Merkel will have to form a minority government or there will have to be fresh elections – both potentially negative developments for the currency.

In practice, this means political instability is as much a fear in the Euro-Zone as it is in the UK, where the political future of Prime Minister Theresa May remains under a cloud. If her ruling Conservative Party decides to replace her, or she decides to call a general election, the Pound would certainly suffer – but currently that seems less likely than it once did.

The current stability of EURGBP therefore seems unlikely to last much longer. One serious possibility is that political problems in Germany or Italy – or a breakthrough in the Brexit negotiations – knock EURGBP lower, particularly as the European Central Bank shows no sign of bringing forward its timetable for tightening Euro-Zone monetary policy.

EURGBP Price Chart, Daily Timeframe (September 1, 2017 to February 22, 2018)

EURGBP price chart

Chart by IG

As the chart above shows, EURGBP has mostly traded in a relatively narrow range between 0.90 and 0.87 ever since mid-September last year. However, if Germany’s SPD votes against a coalition government or Eurosceptics become part of a coalition in Italy, it can be expected to drop. Any move under the January 25 low of 0.8690 would be a strong sell signal, while only a climb above January 12’s 0.8929 high would dispel the negativity. A stop just above there would therefore be wise.

--- Written by Martin Essex, Analyst and Editor

Feel free to contact me via the comments section below, via email at martin.essex@ig.com or on Twitter @MartinSEssex

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