Harold Wilson said “A week is a long time in politics” back in the mid 1960s. Never has this been more true than after PM May’s failed gamble of a snap election. After writing about EUR/GBP a few months ago when the pair was on multi-month lows around 0.8350, its seems like a good time to look at the pair as we are near key long-term, year-to-date highs and major resistance levels around 0.8850.
Of course, sterling has been a well-known political football for some time and that's not about to change. EUR/GBP gapped higher after the decisive French election victory by Macron and has advanced strongly since then in a series of bullish continuation patterns. The pair then broke out of consolidation at the start of the month after the UK election, breaching 2017 highs two days after the shock result.
Most recently, we’ve had some volatility in EUR/GBP due to Bank of England activity. Last week’s 5:3 vote showed that the MPC was at its closest to a rate hike since 2007. That one of those members who voted for a hike is leaving was some comfort for the market as it was presumed that the core of the Committee is still on the dovish side with the Bank in no rush to raise rates and certainly not before 2019. Interestingly, it is more likely for the MPC to change their bias en-masse to voting for a hike as opposed to accumulating over time. The pair’s losses after this surprise vote were nullified on Tuesday when Governor Carney’s said that ‘now is not yet the time’ to tighten monetary policy. He referred to mixed signals on the economy and in particular anemic wage growth.
EUR/GBP rebounded above 0.88 but today we’ve had yet more Bank of England induced swings. Haldane, the chief economist and one of the most dovish members of the MPC, said a move to ‘partially’ withdraw some stimulus would be ‘prudent relatively soon.’ Sterling has jumped and we have halved the Carney gains in EUR/GBP at the time of writing.
Going forward, the UK political uncertainty, coming in numerous strands, should weigh on the pair. These include the DUP/Conservative alliance (if there is one) and how strong PM May’s hand is both domestically and during Brexit negotiations. Additionally, the divisions in the Bank of England will keep the market on edge. If cracks and creaks appear, especially on the political stage, then the 2017 top of 0.8854 can be taken out on the way to the 0.90 area. On the other hand, any Brexit clarity should enable EUR/GBP to fall back to around 0.87 and back into range trading. Only a break below the June low of 0.8655 would significantly ease pressure on GBP.