KTM FX Weekly: Can EURGBP maintain its dominance?

• EURGBP outperformed in May for the past 4 years.
• Busy week with election and BoE policy meeting.

As the title cited, the Euro currency has been outperforming the pound since 2017 with an average of 2.50%. We believe this May is completely different from the others as the vaccine rollout program is the key driver to the EURGBP nowadays. Looking ahead, this week’s UK local election and BoE policy meeting cast the trend.

In April, EURGBP rallied nearly 2%, its first green monthly candle after six straight red lights. The same pattern which we saw was between August -December 2019. As shown on the below chart, 200MAs pushed the cross higher during the early stage of the pandemic. Now the scenario is completely different. UK vaccine program is leading against the US and EU. Will location election repeat the history itself? We have to wait until May 06.

• “The share of the population having received the first shot stands at 62.4% in Israel, 50.2% in the UK, 43.6% in the US, 26.7% in Germany, 24.6% in Spain, 22.7% in Italy, and 21.9% in France” according to the Goldman Sachs research note.

Local election risk:

Looking beyond vaccine news, this week’s Scottish and UK local election headlines will grab the attention. This Thursday, May 06, local elections will be held across the country.

• “About 48 million people can vote, to elect about 5,000 candidates to positions of power.” As per BBC.
• In its FX daily note last week, Credit Agricole highlighted two political risk factors that could hurt the GBP.

1. With the elections for the Scottish parliament looming large next week, recent polls are still predicting a super-majority for the parties in favor of holding another independence referendum.
2. Also on May 06, local elections will be held across the UK, and their outcome will be used to assess the damage done to the Tory party’s popularity from the latest controversies that surround the UK government and are cantered on Prime Minister Boris Johnson.

GBP FX:

For 3-weeks, the price capped at 0.8720. A short squeeze would trigger in case of political uncertainty arises. In this case, 0.8850 would be the immediate destination. 

EURGBP tops 0.8850. That’s going to be quite a headline when it happens. With the Eur crosses continue to trade sideways, the EURGBP is standing tall amongst and trading on the verge of another breakout level. We call this a neckline.

On the flip side, 0.8580 and 0.8530 are offering decent support. In case of tampering announcement, 0.8400 and 0.8300 is highly likely in the coming days.

Macros:

Data wise, it was a light economic calendar to the pound. Looking ahead, the Bank of England policy meeting is the key to focus.

Bank of England: BoE to follow wait and see approach

Looking at the recent G10 central banks meetings, tampering and inflation are the two areas we have been focusing on. In its April 21 meeting, the Bank of Canada was the first Central Bank to announce that that weekly net purchases of Government of Canada bonds will be adjusted to a target of $3 billion. Besides, Fed, BOA, and ECB delivered a dovish tone.

Coming to the Bank of England’s tone, we expect that BoE continues to maintain the bank rate at 0.1% and continue to purchase assets 895bn pounds (QE).

In the April meeting, we expect the MPC exercise wait and see approach along with the ECB and Fed. Hypothetically speaking, if BoE delivers tampering in May, GBP will spike to 0.8400 and 0.8300 against the EUR.

• Danske Bank said, “The Bank of England (BoE) meeting will not bring significant policy changes in our view, as BoE remains in wait-and-see mode (although updated forecasts on the economy and inflation are released). Instead, it is worth keeping an eye on the Scottish election (as well as UK local elections) on Thursday that could have important implications for the likelihood of another Scottish independence referendum and trigger some volatility in the GBP.”
• As per ING, “As for the BoE April meeting, we should see a series of upgrades to the Bank’s forecasts and this encouraging outlook suggests the Bank may announce QE tapering. While this should come as no surprise, on the margin, it should be GBP positive, particularly after the tough month of April for sterling.”

It is important to always keep in mind the risks involved in trading with leveraged instruments.

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