For EUR/GBP traders, there’s been good news and bad news over the last couple of months: The good news is that they’ve had plenty of time to watch the World Cup…and the bad news is that neither bulls nor bears are making any money in the pair.
The historically quiet “English Channel” cross has gone deathly silent over the last 10 weeks. Since mid-April, EUR/GBP has been contained to just a 140-pip range with rates chopping around between support at 0.8700 and resistance up at 0.8840.
Fundamentally speaking, traders are weighing both the geopolitical and monetary policy risks to each currency and finding them perfectly balanced…for now:
Monetary policy favors the GBP…
From a monetary policy perspective, the Bank of England is potentially looking to raise interest rates as soon as August, while the European Central Bank has already suggested that it won’t be touching interest rates until a year from now at the earliest.
In addition, the BOE has already stopped purchasing assets (quantitative easing) and has a plan to start selling off those accumulated reserves when interest rates hit 1.5%; by contrast, the ECB just announced that it will cease its QE program in Q4 of this year, with no explicit plan to start drawing down its balance sheet. Clearly, the BOE is further along the path toward monetary policy normalization than the ECB.
…Whereas geopolitical risks support the EUR
The situation is reversed when it comes to geopolitical risk. While the UK’s looming “Brexit” from the European Union will impact both regions’ economies, the impact on the UK will be far more acute. The UK is set to officially leave the European Union on March 29, 2019, but there are plenty of decisions to be made in the next couple of weeks that will have a dramatic impact on sterling and the UK economy more broadly:
June 28/29 – EU Summit
The European Union had hoped to resolve the sticky issue of the Irish border by this week’s meeting, but little progress has been made. Watch for headlines around this issue, which if unresolved, could increase the risk of a no-deal, “hard” Brexit.
