ADVERTISEMENT

Euro-Pound Record Run May End as U.K. Political Risks Priced In

Euro-Pound Record Run May End as U.K. Political Risks Priced In

(Bloomberg) -- The euro’s remarkable rally versus the pound may be nearing its end as the U.K. political turbulence seems mostly accounted for, while headwinds persist for the common currency.

Sterling has this month set a record-long losing streak versus the euro as the market priced in the prospect of British Prime Minister Theresa May quitting ahead of her resignation announcement Friday, and the risk that her successor could favor a no-deal Brexit. Until there is more clarity on that front, investors may refrain from adding euro-pound long positions, especially with the latest euro-area data denting hopes of an economic rebound.

European parliamentary elections will be concluded Sunday and how populist parties fare may set the tone for short-term price action in the cross, at a time when charts call for a technical correction.

Euro-Pound Record Run May End as U.K. Political Risks Priced In

The euro rose for a 14th session versus the U.K. currency Thursday, boosted by gains versus the greenback after weak U.S. data. The euro-area economic picture isn’t any rosier: private-sector output remained subdued in May amid stagnant demand, while German business confidence was the weakest in more than four years.

This year’s elections for the European Parliament are more closely watched than before, and could weigh on euro sentiment. That’s because there are several perils closely related to the outcome of the vote -- forming majorities may be hard, Italy could head into early elections, French reforms may come under threat, even Greek uncertainties could return to the fore.

Sterling is dominated by political uncertainty and is headed for a third week of losses versus the single currency. Short-term positioning has reflected a bearish outlook, with almost all market participants selling the pound in recent sessions. Real-money names have been more active than usual, as leveraged and macro accounts added shorts, according to traders in London and Europe, who asked not to be identified because they are not authorized to speak publicly.

Euro-Pound Record Run May End as U.K. Political Risks Priced In

As positioning in the cash market becomes overstretched, charts call for a technical correction given momentum indicators have risen to levels unseen in almost two years. Options traders are also reserved to the prospects of further gains in euro-pound with one-week calls trading slightly at a premium versus puts.

  • 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 EU holds continent-wide parliamentary elections, through May 26; EU leaders gather in Brussels on May 28 to discuss candidates who could run the European Commission and the European Central Bank
  • U.S. President Donald Trump meets with Prime Minister Shinzo Abe in Japan on Saturday
  • Bank of Canada policy decision on Wednesday, May 29; rates seen unchanged
  • Liquidity issues may arise Monday as U.S. and U.K. markets are closed for holidays
  • Policy makers’ speeches include Bank of Japan Governor Haruhiko Kuroda, ECB Executive Board member Yves Mersch, Fed Vice Chairman Richard Clarida, Bank of Canada Senior Deputy Governor Carolyn Wilkins
  • Economic releases include euro-area consumer confidence; U.S. GDP, PCE deflator and personal spending; U.K. house data; Norway unemployment; Sweden GDP; see data calendar

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, Anil Varma, Scott Hamilton

©2019 Bloomberg L.P.