EUR/GBP has traded sideways in recent weeks but we could be about to see a downtrend unfold. Enclosed our view of the fundamentals, sentiment, and key technical levels below.
The Impact of COVID
On the charts below, we can see the UK is recovering quicker than euro zone in terms of the economic impact of COVID. The number of new ICU patients now stands at ~200/day vs. ~3,000 in Italy, ~5,000 in Germany, and ~6,000 in France. Data for April indicates economic activity has already started to pick up sharply in the UK. The GS Current Activity Indicator (CAI), a proxy for GDP, stands at an annualized pace of 7.4% in April. In terms of mobilityLondon roads were 15% more congested than pre-covid last week.
In terms of central bank support, the UK will cut is likely to cut its stimulus at a quicker rate than the EU chart below from GS.
EU V UK Economic Outlook
The EU will lag the EU going forward in terms of growth and won’t close the gap which many economists believe last month: “French Finance Minister Bruno Le Maire urged the European Union to speed up disbursements from its flagship stimulus package after the Finnish government threw a potential wrench into the process of releasing the funds. (Bloomberg) The Rescue fund has been forgotten by the market as the ECB simply try and hold the zone together with stimulus but there are problems ahead with the Fund
In terms of the Rescue Fund Le Maire and his German counterpart, Olaf Scholz, noted how they would use their share of the 800 billion-euro ($966 billion) recovery fund to invest in the bloc’s key priorities of tackling climate change ( this is not a priority!) and supporting digital development. In addition the Finnish government called into question how quickly it would approve the EU plan, which all member states must agree on before the bloc can start issuing debt for the projects.
According to Bloomberg: “The EU’s plan is crucial for powering an economic recovery in the midst of a global pandemic that has caused the deepest recession since World War II and left it lagging behind other leading economies.” (Bloomberg) The reality is the weaker economies of the south such as Spain, Italy, Portugal and Greece are unlikely to recover quickly.
In terms of the UK Goldman Sachs has upgraded its forecasts for the U.K. economy in 2021, and now see it doing better than the U.S. Last month the U.K.‘s flash composite purchasing managers’ index reading for April moved up to 60 from 56.4 in March, its highest level since November 2013. Retail sales also came in better than forecast in March moving up 5.4% from the previous month, while a GfK survey showed British consumer sentiment this month rose to its highest point since the pandemic. Not only is the outlook for the UK economy good but it still remains very oversold on the sell-off around BREXIT.
Technical Analysis
On the weekly chart below the EUR rally which started in April has corrected oversold with a rally up to the 20-month moving average and in the last couple of weeks, volatility has dropped as we stall below the level and we now expect a downturn and have a long term target of 0.8300. On the daily chart, we have moved below the 20-day moving average and if we take out support we expect a move down to daily chart lows and then a move on to weekly support. For long-term trend traders, the setup offers low risk against high reward longer term.
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