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With ECB-Led Momentum Cooling, EUR/GBP a Target for Bears

With ECB-Led Momentum Cooling, EUR/GBP a Target for Bears

Talking Points:

  • The Euro's exceptional 2017 performance pushed EUR/GBP to a eight-year high this past month
  • Much of the lift behind the common currency has been the strong speculation surrounding an ECB policy reversal
  • After the ECB remarks Thursday, both currencies face fundamentals less angled towards trend and more supportive of drift

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The Euro has enjoyed the most impressive performance across the 'majors' through 2017. In contrast, the Pound has been the most listless of the same group over the period. That dichotomy in motivation - though not necessarily direction - has earned the EUR/GBP a remarkable climb to the pair's highest level in eight years as of last month. While the lift this pair has generated has its fundamental backing, the intensity is more dubious. Speculative appetite can be a persistent driver and does not need to follow strictly rational lines. Yet, eventually fundamental gravity starts to weigh on the markets. That is especially true when a strong speculative drive loses vital momentum. With the familiar sources of drive easing, EUR/GBP is increasingly prone to corrections that support a move back into range by mere course of moderation.

Between these two major currencies, the Euro's role in dictating trend and intensity is arguably more important. That said, this past sessions' ECB (European Central Bank) rate decision has cut off the most common source of bullish fuel FX traders have fallen back on for the remarkable pace of Euro climb. Following no change in the existing policy schema, the statement and President Mario Draghi's remarks offered little foothold to escalate anticipation that the reversal from the market's most expansive easing program was any more certain or proximate. In fact, the remarks that further easing was an option and inflation was the sole benchmark weaken the forward premium the shared currency has rapidly accumulated. Draghi did suggest that decisions on the QE program could be made next month, but that steals the wind from speculative sails in the meantime; and this currency has already charged remarkably high.

Meanwhile, the Pound has struggled for consistent motivation one way or the other. Brexit has hung over the Sterling's head with no material progress made towards the eventual divorce and plenty of skepticism voiced by those negotiating terms from the EU's side. The Pound suffered a severe discount in the six months that followed the vote to exit the Union - I would argue to a level that would reflect close to a worst-case scenario - so there is a natural rebalance pressure behind the market. Without drive, the impetus for finding equilibrium will draw serious skepticism over the multi-year highs this pair has reached - especially without momentum to satiate speculators to distract from questions. There are two approaches that I see as viable for looking for a counter-trend view. On the short-term, limited movements on swells that stall at a descending trend channel resistance is more fitting of the prevailing trend and general market conditions. For the medium-term, I will look for a break of 0.91 and preferably some fundamental charge to encourage a stronger swing. We focus on this fundamentally and speculatively challenged pair in today's Quick Takes video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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