“Time to Sell” British Pound v Euro and US Dollar

  • Pound to Euro exchange rate today: 1 GBP = 1.1152 EUR
  • Pound to Dollar exchange rate today: 1 GBP = 1.3016 USD

It’s “time to sell GBP” says Athanasios Vamvakidis, a foreign exchange strategist with Bank of America Merrill Lynch Global Research.

The call by Vamvakidis comes as momentum shifts against Sterling once more.

The UK currency is seen suffering a fresh bout of weakness having declined to fresh eight-month lows against the Euro with GBP/EUR going down to 1.1122 in the wake of the European Central Bank’s July policy briefing.

“We see bearish GBP risks mounting,” says Vamvakidis. “The second round of Brexit negotiations this week show no progress”.

The UK and EU got together in Brussels to try and make headway on issues concerning the Irish land border, the exit bill and the rights of UK and EU citizens.

The talks were technical and no major breakthroughs were announced and the general feeling amongst traders is that a wide chasm still exists between the two sides.

The reality of the situation brings Brexit firmly back into the spotlight for Sterling, and the glare is not comfortable for the UK currency.

“Press reports suggest that the EU is not including the UK rebates in its calculation of UK budget contributions post-Brexit, which we believe would be a non-started for the UK,” adds Vamvakidis.

Domestic politics are not constructive either with the UK government apparently divided on its Brexit strategy and goals while high uncertainty about the government’s sustainability in its current form continue.

We did however report a positive development on this front on Friday, July 21 when Environment Secretary Michael Gove stated that there was unity amongst cabinet colleagues on the issue of a two year transition period being put in place once the UK exits the EU in March 2019.

The stability of the exit process has long been a concern for markets, and suggestions that a unified approach to the matter is crystallising will certainly play positive for Sterling we feel.

ECB Removes Ceiling to Euro Strength

Concerning the Pound v Euro, the outlook remains firm with the analyst community looking increasingly bullish on the single-currency’s prospects.

The Euro’s broad move higher has been consistent with improving Eurozone data and could no doubt continue if the data keeps improving.

But, it is the ECB’s unwillingness to talk the Euro down which really matters.

During the press conference to the July meeting we picked up on Draghi’s answers to a question regarding the ECB’s tolerance of the Euro’s strength.

In the past the ECB has shown a nervousness about the Euro becoming too strong, lest it work against the ECB’s agenda of boosting the Eurozone economy. After all, a stronger Euro makes for more expensive European exports.

“It’s true there have been movements in bond price, asset price, exchange rates and so on,” noted Draghi, “but financing conditions remain supportive.”

So while a “repricing of exchange rate has received some attention during various exchanges,” as noted by Draghi, there appears to be little concern with the value of the Euro at this stage which might have been taken by some traders as a green light to buy.

“The pre-ECB EURUSD level was a key threshold for the market, as this was the level at which the ECB used to intervene verbally in the past to express concerns about the strong currency and its negative implications for inflation. By avoiding such statements, Draghi has effectively removed the acceptable EUR ceiling for the ECB. Further EUR appreciation could become easier, as the ECB seems to have given up trying to “control” the currency,” says Vamvakidis.

So that’s a green light for the Euro then.

US Dollar Weighed Down by Domestic Politics

One currency that Sterling might find some strength against is the US Dollar which looks to be struggling amidst the continued political intrigues of Washington.

The US Dollar is weak and the Dollar index – a measure of the USD based on its strength against key partners – is pushing to fresh lows on the back of renewed political uncertainty out of Washington.

“The theme appears to be escalating in the aftermath of Thursday’s Mueller headlines as market participants assess the implications for the administration’s growth agenda and the outlook for the Fed,” notes Eric Theoret, a strategist with Scotiabank.

Special counsel Mueller, who is in charge of the Russiagate probe, apparently intends to extend the investigation to other branches of Trump’s activity, including the business transactions of his companies.

There is a sense amongst traders that Trump’s problems mean his promised tax cuts and spending increases are now further away than ever.

 

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