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Bullish EUR/GBP on Increasing GBP Risks & Options Pricing

Bullish EUR/GBP on Increasing GBP Risks & Options Pricing

2017-07-13 15:33:00
Tyler Yell, CMT, Currency Strategist
Share:

Point to Establish Long Exposure: Retracement to 0.8760

Spot: 0.88202

Target 1:9000 (Psychological Level)

Target 2:0.9225 (2016 High)

Invalidation Level:0.86516 (June low)

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Fundamental, Sentiment, & Technical Focus:

First, we look at the fundamental picture, which does not appear to be improving, as GBP Bulls would like. On Thursday, The Bank of England released their Q2 2017 Credit Conditions Survey, which may point that BoE Governor Carney will be stock in the realm of Japan as a central banker who holds back on normalization as others plunge forward like the Bank of Canada and the ECB.

In the 2Q Credit Conditions Survey, the reinvestment expectations from businesses were particularly concerning. On page 10 of the survey (access here), business loan demand for the purpose of “capital investment,” which is accounting speak for hard assets to grow and sustain earnings in a business is shrinking and has been falling since early 2016. In July, we heard Carney & Co. say that they would be focusing on the reinvestment of businesses as one of three key metrics that composed of Brexit negotiations outcomes that would be favorable to the UK economy, business growth, and wage inflation.

That would help us to believe the BoE, and their respective MPC may be left behind as other’s pull forward and favor looking tactically for GBP opportunities in the near-term.

When looking at options pricing, which is a compliment to sentiment analysis, EUR/GBP is worth our attention. Across G10 + Crosses, the premium being paid by options traders for upside protection (read: EUR/GBP breakout) is the highest over the coming month for EUR/GBP. The second and Third place goes to EUR/USD, and EUR/CAD respectively. This EUR focused options premium shows that options traders expect both EUR strength and GBP weakness particularly, but also more broad EUR strength.

As of July 13, the premium being paid for out of the month EUR/GBP calls over the coming month to out of the money puts of 0.47X, and currently leads 23 currency pairs that make up G10 + crosses with the highest out of the money call premium.

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On the technical side (chart below), EUR/GBP may provide better levels to sell, but I will be watching 0.8760/50 as a zone of support to begin building exposure. Given the choppy nature of this market for 2017, it’s hard if not impossible to pinpoint when a breakout will occur from a range. However, the scene appears set for a move back to the 2016 high of 0.9225 if not higher. A break above 0.8949, the July 12 high will be an indication that further Sterling weakness or EUR strength is upon us.

IGCS Highlight:

Bullish EUR/GBP on Increasing GBP Risks & Options Pricing

EURGBP: Retail trader data shows 38.8% of traders are net-long with the ratio of traders short to long at 1.58 to 1. In fact, traders have remained net-short since May 16 when EURGBP traded near 0.84424; theprice has moved 4.6% higher since then. The number of traders net-long is 7.9% lower than yesterday and 25.2% lower from last week, while the number of traders net-short is 23.5% lower than yesterday and 16.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURGBP prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURGBP trading bias. (Emphasis mine)

EUR/GBP remains in Bullish posture as UK Fundamentals deteriorate:

Bullish EUR/GBP on Increasing GBP Risks & Options Pricing

Created by Tyler Yell, CMT

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Happy Trading!

Tyler Yell, CMT

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