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EUR/GBP Continuation, GBP/JPY Reversal Gathering Pace

EUR/GBP Continuation, GBP/JPY Reversal Gathering Pace

2016-12-01 13:25:00
Christopher Vecchio, CFA, Senior Strategist
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Talking Points

- Commentary from UK & EU officials increasingly pointing to a 'soft' Brexit.

- EUR/GBP breakdown comes days ahead of Italian referendum.

- Evidence piling up that GBP/JPY bottom is in.

The US Dollar is trading slightly lower across the board this morning (via DXY Index) as a series of data surprises from Europe and unexpected, diplomatic commentary regarding Brexit have boosted appeal for the Euro and the British Pound. Yet only one of these currencies' sources of strength may have true staying power.

Unfortunately, that currency isn't Euro. Despite some of the upbeat PMI figures and evidence that Euro-Zone unemployment has moved to a seven-year low, there's still the daunting Italian constitutional referendum on Sunday, which looks like it is going to fail - and threaten to send the Euro hurdling towards its 2011/2012 existential crisis abyss.

Even in the event that the Italian referendum passes, clearing the path for needed structural reforms (albeit at the expense of democracy, and in turn, giving the prime minister unprecedented legislative power), the Euro and Europe are far from out of the woods; the prospect of a Marine Le Pen French Presidency should keep markets on edge through the April and May elections.

The British Pound, on the other hand, may see that its positive influences have staying power. Our long-term view of Brexit has always been that, because parliamentary ratification of the June 23 Brexit vote would be necessary before Article 50 could be triggered, and that the vast majority of MPs were in favor of 'Remain,' that once Brexit took shape, it would be of the soft variety; that the UK could enter a relationship with the EU akin to what Switzerland has under EFTA or Norway under EEA.

Accordingly, today's comments from Brexit Secretary Davis and Eurogroup President Dijsselbloem seem to point in that very direction. Too much negativity may be baked into the GBP cake right now. As such, while the economic populist bug may have originated in the UK with Brexit, it has far worse consequences of its inspires fringe parties across Europe to upend the establishment and withdraw from the Euro-Zone and Euro.

Amid the rising yield environment, the US Dollar should remain well-supported in the foreseeable future; yet taking all of this into account reveals fundamentally appealing setups in EUR/GBP and GBP/JPY. See the above video for technical considerations in EUR/GBP and GBP/JPY, as well as in EUR/USD, USD/JPY, Gold, GBP/USD, AUD/USD, and DXY Index.

Read more: US Dollar Ready for More Gains versus Yen, Gold

--- Written by Christopher Vecchio, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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