The Great British Pound vs. The Euro

The Great British Pound (GBP) traded near a one-month low versus the dollar on Thursday as concerns about global growth and Spain weighed on perceived riskier currencies, though it edged up against the euro.

The pound was vulnerable after Standard & Poor’s cut Spain’s rating to BBB-minus, just above junk status, while concerns remained over when Madrid will apply for a bailout and about company earnings being hit by a global slowdown.

On Thursday morning, EUR/GBP set a correction low at 0.8022 as the impact from the S&P downgrade of Spain weighed. Some hawkish comments from BoE member Weale overnight (the policymakers suggested that more QE might be compatible with the BoE inflation target) might have been a (minor) factor for the sterling outperformance, too. EUR/GBP changed hands in the 0.8035 area at the start of trading in Europe.

As was the case for EUR/USD, the negative impact from the S&P downgrade and from other negative headlines on European markets was limited and EUR/GBP took also the way north again. The pair moved beyond and tested the 0.8062 ST resistance (Wednesday’s top) around noon and did break beyond this level later in the session. The late session setback in US equities also prevented further risk-on gains in this cross rate.  Yesterday’s break was again a purely euro move. There was very little in the way for UK (eco) news. EUR/GBP closed the session at 0.8057, compared to 0.8044 on Wednesday.

Concerns about a weak UK economy and the prospect of the Bank of England opting to extend its quantitative easing programme in November were expected to keep sterling under pressure against the dollar and cap any gains versus the euro.

BoE policymaker Martin Weale told the Daily Mail newspaper he was concerned another round of QE may not be “compatible” with the Bank of England’s inflation target but he also warned Britain was at risk of a ‘triple-dip’ recession.

This morning in Asia, EUR/GBP is holding close to yesterday’s intraday top. As is the case for EUR/USD, we also have the impression that the day-to-day momentum in EUR/GBP is improving. After the correction earlier this week, the downside has become better protected. Later today, the UK eco calendar is empty. Global factors and the overall sentiment on the euro will remain the key factors for EUR/GBP trading.

The commitment of ECB’s Draghi to do whatever is needed to protect the single currency triggered also a U-turn in EUR/GBP. The pair reached a corrective top at 0.7963 mid-August. A new up-leg early September pushed EUR/GBP even beyond this level. This break improved the technical picture. The price action in both EUR/USD and cable is for an important part driven by the dollar side of the story and by global sentiment on risk. In a risk-on context, EUR/USD tends to outperform cable, thus supporting EUR/GBP. As the risk-rally ran into resistance mid September, the balance between EUR/USD and cable changed, pushing EUR/GBP into a correction. This week’s setback in the pair was slightly disappointing. Nevertheless, even after this correction, EUR/GBP is still fairly close to the 0.8115 range top. Investors probably need a clear improvement in global sentiment on risk to try a new attempt to break above

this level. As this is not available, EUR/GBP might see some consolidation shortterm. We maintain on MT positive bias in this pair