As the UK works at an amiable exit from the European Union, speculation has factored in a host of negative positive outcomes for the Pound. But what happens to the Euro as this event progresses and what are the implications for EUR/GBP?
- EUR/GBP has carved out a defined range over the past three months that suits historical conditions of December reserve well
- Big picture, recent consolidation stands as a reversal threat to a much larger trend
- Fundamentals are the missing ingredient for this pair, and Brexit is the most striking and underpriced risk ahead
See how retail traders are positioning in EUR/GBP, EUR/USD and GBP/USD intraday using the DailyFX speculative positioning data on the sentiment page.
When you think of currency pairs that are staging trade opportunity; pairs like EUR/USD, Yen crosses for risk trends and the Dollar with the FOMC rate decision next week are more popular targets of focus. Yet, these are not the most dynamic opportunities in the FX market. The appeal for these liquid currencies and pairs is both the familiarity and hope for volatility - whether through thematic or event based fundamentals or simply through undefined forces. Trading deeper into December reflects a historical norm that frequently sees speculative waves persistently decline with instances of major breakouts and trends particularly rare. Pursuing these unlikely events sets us up statistically on the wrong side of probability.
Ideal opportunities for current conditions will bridge the seasonal expectations for low volatility but can also offer considerable amplitude if the unexpected does occur with a strong speculative wave appearing. The EUR/GBP exchange rate is uniquely positioned to take advantage of both states. On the technical side, the past three months for the pair has carved out a wide but established range. In a more complex picture, that period of congestion could count as a clear shoulder on an otherwise choppy head-and-shoulders pattern. No H&S pattern is truly deserving of the name without a distinct trend at risk for reversal. EUR/GBP certainly has such a persistent run that it can reverse with proper motivation. And yet, if unprovoked this pair could be left to its own devices to trace out a path of least resistance that simply ranges comfortably in well establish boundaries. Fundamentals represent a strong anchor for near-term restraint. The Brexit uncertainties have acted to keep all Pound crosses in check - whether that restraint has a gradient (trend) to it or not.
Yet, should Brexit discussions progress or devolve, the implications are weighty for this pair in particular. The Pound's side of this theme have been frequently explored in trading circles, analysis and central bank reports. The United Kingdom's divorce from the European Union risks losing access to the country's largest trade partner if the single market is not open for trade. That concern - and the slow ebb of fear for that worst case outcome - has provided most of the progress that the Sterling has forged, both bullish and bearish. Yet, what is too frequently overlooked is the fact that Brexit poses an existential threat to the Euro-area and the shared currency itself. While the UK is not part of the monetary and banking union, its exit from the wider EU can serve as the template and motivation for other countries to follow suit. And, as it happens a number of the Eurozone economies could see the largest 'pro' list to a length withdrawal. What does this mean for the Euro and EUR/GBP? We discuss the appeal of this pair between technical, fundamental and conditional analysis in today's Strategy Video.
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