Pound Hits Multi-Year Lows Against The Euro – Call Options Suggested On EURGBP
Euro took off to five-year highs against the British Pound on Wednesday, amidst concerns over potential policy divergence between the European Central Bank and the Bank of England in the near future. The ECB is on the verge of winding down its 80 billion euro ($90 billion) monthly bond purchase program. Further the ECB may soon bring to an end its quantitative easing program as well. The BOE, on the other hand, may cut its benchmark rate further or unleash more stimulus measures to assure a domestic market rattled by uncertainties related to the Brexit vote and subsequent negotiations.
Bloomberg reported on Tuesday that the ECB will probably gradually taper down the asset-buying program before the conclusion of its quantitative easing program. At the policy meeting on September 3rd, the central bank officials made no changes to the existing stimulus package, and did not discuss any potential expansion of the bond purchases that are currently scheduled to expire in March 2017.
The ECB is considered to be mirroring the strategy of the U.S. Federal Reserve, which started reducing its monthly bond purchases by $10 billion in December 2013 and ended them in October 2014. However, the final decision will depend on the euro area’s economic outlook. The next policy meeting of the ECB is scheduled to be held in two weeks time.
Economic data from the euro-area today reported that the bloc’s services sector is losing steam. Research group Markit reported earlier today that the Purchasing Managers’ Index (which measures business confidence among managers working in services sector) slid to 52.6 in September from 52.9 in August. Although a reading above 50 signals expansion, this is the lowest reading since January 2015.
The decline in business sentiment was driven by political uncertainties including the potentially negative impact of Brexit and upcoming elections in France and Germany, not to mention ongoing political unrest in southern European nations such as Italy and Spain.
Separately, the European Union’s statistics agency stated that retail sales in the eurozone shed 0.1% in August compared to July. On a yearly basis, retail sales grew only 0.6% – the weakest year-to-year rise since July 2014.
In the U.K, data reported by Markit, indicated that the services sector continued to grow in September following a surprise recovery in August. The purchasing managers’ index for the services sector fell slightly to 52.6 last month, but remained above 50 and beat economist expectations. The index for the service sector, which accounts for 80% of annual economic output in Britain, shrank sharply in June and July as a result of Britain’s vote to leave the European Union.
UK data that came out today helps complete the full set of positive economic data, after positive PMI readings from the manufacturing and construction sectors that were published earlier this week. The UK economy has been performing much better than expected following the EU referendum shock result. However, the Sterling, which has lost ground to most of its peers after British Prime Minister Theresa May said on Sunday that she would trigger the process of negotiating the UK’s exit from the EU by the end of March, may not be supported much by the data. This is because the data reported today did not include any potential negative effects of May’s statement.
Fig: EURGBP D1 Technical Chart
After three months of remaining trapped between the 50.0% level and the 61.8% level, EURGBP has broken out of this trading range to the upside, and is attempting to climb higher. The RSI index has soared to 73.71 which reflects an overblown buyers market. This may be a good time for sellers to sneak in to sell highs or for buyers to take profits. After a period of consolidation and profit taking, the market is expected to resume its uptrend.
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