I posted on Facebook a few weeks back that I was happy to be short EUR/GBP heading in the ECB Interest Rate decision, and 2 weeks later I remain happy to be short.
As expected the ECB used their last meeting to introduce a host of policy measures aimed at stimulating the Euro zone economy. Such measures included negative interest rates and cheap long term loans to banks.
But the question is – what does this actually mean for the Euro?
Surprisingly these new measures are not directly Euro negative, but they are indirectly. Essentially the ECB has taken steps to increase the liquidity in the region in order to stimulate economic activity, which is actually a good thing. However, this is likely to lead to rising asset valuations and consequently reduce the region’s attractiveness to foreign investment.
The shift from net purchasers of Euros to net sellers will weigh on the single currency.
Furthermore, we cannot discount that investor sentiment towards the Euro has completely reversed since the ECB’s meeting on June 5th. Latest IMM Non-Commercial positioning data shows investors are net sellers. This may pose a short term obstacle for further declines, but this confirms investors have taken the ECB’s measures as currency bearish.
So the next question is – what is a good currency to buy against the Euro?
Recent news signal the Bank of England closer to tightening monetary policy that investor’s had originally anticipated. MPC members Carney, Weale and Mcafferty have all publicly declared their support for the prospect of raising rates earlier than forecast.
Interest rate hike expectations have steepened in recent weeks, and there is a high correlation between U.K Money Markets curve and the GBP.
At the same time U.K domestic data has shown signs of a broad based and sustained recovery fronted by a strong Manufacturing sector.
Technical Analysis
Our proprietary software and strategy gave us the latest short signal on 3rd June 2014. The software analyses market conditions and technical indicators on multiple time frames and produces bias.
Conclusion
There is a strong argument that suggests GBP will outperform the Euro as central bank monetary policy developments and investment environment diverge.
If we consider the bearish signal from our proprietary software we have both fundamental and technical justification for our short EUR/GBP bias.