Euro's Lockstep Dance With Pound to Spin on Despite Event Risks

(Bloomberg) -- Traders are betting that the euro will be stuck in its recent range versus the pound despite event risk next week.

Demand for options that benefit from wide swings in the euro-pound pair have dropped in recent days even though the European Central Bank and European leaders will hold meetings on April 10. That’s because investors don’t expect ECB officials to deviate from March rhetoric, while the pound may have limited potential for a powerful rally on headlines from the emergency Brexit summit.

Next week will mark the current deadline for the U.K. to leave the EU on April 12, yet markets have already priced in another extension. U.K. Prime Minister Theresa May has written to European Council President Donald Tusk to request a delay until June 30, while Tusk is said to be proposing a one-year extension.

If anything, there is a greater risk that the euro drops below the lower end of its recent 0.85-0.87 range versus sterling than of it rising higher. While ECB President Mario Draghi may refrain from sending fresh policy signals, he’s expected to keep citing downside risks to growth and essentially putting a cap on any rallies in the common currency.

At the same time, confirmation of an extended Brexit deadline and signs that a softer form of the divorce will materialize may support the pound. However, as price action has shown lately, the U.K. currency may post only modest gains. This could attract range-seeking investors amid a short-gamma market that defend barriers at the range’s extremes.

For the euro to surge above 0.87, a hawkish shift from the Governing Council that would catch the market off guard would be needed, or a total breakdown of talks between the EU and the U.K. The common currency could gain ground from improved risk sentiment as trade talks between U.S. and China progress, yet a lower dollar across the board would also boost the pound.

The options market is assigning a 27 percent probability that the euro will trade below 0.85 by the end of next week and a 20 percent chance for a move above 0.87.

• NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice

What to Watch:

• The annual Spring Meetings of the World Bank Group and the IMF begin in Washington, through April 14
• April 10 will see the ECB policy meeting, the EU’s emergency summit to discuss Brexit and the Federal Open Market Committee’s release of minutes from its March meeting
• Policy makers’ speeches include Fed Vice Chairman Richard Clarida, New York Fed President John Williams, Bank of Canada Senior Deputy Governor Carolyn Wilkins, Bank of England Governor Mark Carney
• Economic releases include euro-area industrial production; U.K. trade balance, industrial and manufacturing productions; U.S. inflation, factory orders; Sweden and Norway inflation; see data calendar
• South Korean President Moon Jae-in visits the White House and will meet with U.S. President Donald Trump to discuss resuscitating nuclear talks with North Korea on April 11

To contact the reporter on this story: Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net

To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Neil Chatterjee, Scott Hamilton

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