Article / 06 December 2012 at 14:38 GMT

EURGBP set for more downside after ECB

John J Hardy John J Hardy
Head of FX Strategy / Saxo Bank
Denmark

EURGBP has executed a considerable pivot lower over the last couple of days and the action suggests that a move lower still awaits - to at least the 200-day moving average.

Today’s ECB meeting did little to support the Euro’s cause. The currency had recently been bid up considerably on falling tail risks, as evidenced by tightening bond spreads at the periphery. But the weak Spanish bond auction yesterday saw peripheral spreads blowing back wider yesterday, and for a long time, the market has been moving the forward rate expectations for Europe lower. Meanwhile, no new decision was taken by the Bank of England today and one wonders if the Bank will be a bit passive for a time until Carney arrives on the scene next year. As well, Osborne’s commitment to austerity (though still austerity-lite if we look at the on-going large magnitude of UK fiscal profligacy that is only being covered by BoE activism) could also act to support sterling a bit.

Chart: EURGBP
Note the pattern I have outline in the stochastics – though of course all patterns eventually come to an end. The more compelling short term development is the strong sell-off late yesterday and after a key event risk in today’s ECB meeting that has now see the entire sequence above the old 0.8110 resistance taken out. This puts in place a triple top and suggests a probe of the 200-day moving average a bit lower (black line), though there are also some interesting head and shoulder like considerations if the action takes us all the way below 0.8000.

eurgbp

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