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Brexit Briefing: Can Draghi Prevent EUR/GBP From Rising Further?

Brexit Briefing: Can Draghi Prevent EUR/GBP From Rising Further?

2017-08-22 14:56:00
Martin Essex, MSTA, Analyst
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Talking Points

- For EUR/GBP traders, Brexit will be on the agenda again next week when the third round of talks begins.

- But before then it will be important to listen to what Mario Draghi says at Jackson Hole.

Check out our EUR and GBP Trading Guides: they’re free and have been updated for the third quarter of 2017

EUR/GBP has been essentially a one-way trade since mid-April, climbing from a low of 0.8312 on April 18 to its current level around 0.9168 and inevitably prompting talk of a long-term move to parity between the Euro and the Pound. However, even if that proves to be the case eventually, there will be many hurdles to jump on the way and two are coming up shortly.

First, European Central Bank President Mario Draghi will be speaking at the Kansas City Fed’s economic policy symposium at Jackson Hole, Wyoming, on Friday. It’s almost inevitable that Federal Reserve Chair Janet Yellen, who speaks on the same day, will be the focus of attention but that doesn’t mean Draghi can be ignored.

The Reuters newsagency has reported that Draghi won’t be offering guidance on when/if the ECB will begin reducing its monetary-stimulus program – known in the markets as ‘tapering’ – but that doesn’t mean he won’t join the chorus of central bankers trying to talk down their currencies in an effort to improve competitiveness. Incidentally, the Bank of England has confirmed to DailyFX that Governor Mark Carney will not be attending and that while Deputy Governor Ben Broadbent will be, he won’t be speaking.

Given that EUR/GBP is now clearly in overbought territory, Draghi might well decide the time is right to give bulls in the cross a warning shot.

Chart: EUR/GBP Daily Timeframe (April 10, 2017 – August 22, 2017)

Brexit Briefing: Can Draghi Prevent EUR/GBP From Rising Further?

Chart by IG

Then there’s the Brexit negotiations between the UK and the EU, which resume for their third round next week. The two sides are still way apart, with the UK wanting to talk about trade but the EU insisting it wants to talk first about residency rights, the UK’s divorce payment and the Irish border.

Any signs that the UK is making progress towards an eventual agreement – a ‘soft’ Brexit – could give the Pound a boost and add to any downward pressure on EUR/GBP from a combative Draghi. Nonetheless, the markets will still be betting on a tapering announcement from the ECB at one or both of its September/October meetings, paving the way for it to begin in the New Year. And that will likely mean further EUR/GBP strength to come whatever Draghi says at Jackson Hole and whatever happens in next week’s Brexit talks.

Join my webinar at 0745 GMT tomorrow, Wednesday, for live data coverage of the August Euro-Zone PMIs before and after their release

--- Written by Martin Essex, Analyst and Editor

To contact Martin, email him at martin.essex@ig.com

Follow Martin on Twitter @MartinSEssex

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