Euro Upside Versus the Pound May Only Have Technical Thumbs Up

(Bloomberg) -- The euro maintains a bullish tone versus the pound on the charts, but long positions through options may feel the weight of an ongoing trend of softer data out of the monetary union.

The common currency advanced in the past couple of weeks after concern that Britain will crash out of the European Union hit demand for U.K. assets. Still, the scope for further sustainable gains may be limited as option markets suggest investors have already hedged additional pound weakness, and the double whammy of a slowing economy and rising political tension in the euro area tilts the balance of risks back.

Euro Upside Versus the Pound May Only Have Technical Thumbs Up

Risk reversals over the three-month tenor, a barometer of sentiment and positioning, show options traders are the most bearish on the pound since July 2016 as the risk of a no-deal Brexit rises. This narrows the path of a strong euro rally as some may opt to take profit on their exposure, while there will be small need to chase the market higher.

Taking into account growth troubles in the euro area makes fading euro gains a possible market play. Investor confidence in the bloc hit a four-year low last week, retail sales fell by the most in seven years on a monthly basis, while German factory orders saw their biggest annualized decline in six years. Euro-region industrial production and gross-domestic-product releases due this week may underpin the European Commission’s slashing of growth forecasts.

The latest rift between French and Italian leaders highlights the political risks stemming for the euro as increased integration fails to materialize, just as populists threaten to emerge stronger at the Parliamentary elections in May. Pound bears can only hope that a debate over Spain’s fiscal plan won’t signal early elections are looming. El Pais reported Friday that the Catalan separatist party PDeCAT will seek to block the budget.

Euro Upside Versus the Pound May Only Have Technical Thumbs Up

The U.K. Parliament, with less than two months before its deadline to leave the European Union, may vote on alternatives to Prime Minister Theresa May’s defeated Brexit legislation Thursday. While the pound turned defensive after the latest services data, EU divorce talks are still the key driver for sterling. Consequently, inflation and growth numbers out of the U.K. this week may have only a knee-jerk effect on the pound.

The Brexit mess could see euro-pound climbing toward key resistance at 0.8897, the 55-daily moving average, as a candle pattern on the weekly chart -- the so-called bullish belt hold line -- suggests January’s downtrend has now lost traction. Still, new year-to-date lows could mean a three-year long rally for the common currency is about to revert.

What to Watch:

  • Euro-area finance ministers meet on Tuesday to discuss the European Commission’s economic forecast, deepening the economic and monetary union, the EU budget, and the bloc’s tax policy.
    • Spain’s parliament begins key debate on 2019 budget.
  • Riksbank is expected to keep interest rates at -0.25% the following day after the first increase in more than seven years in December. Governor Stefan Ingves meets with reporters.
  • The U.K. government has confirmed that if no new Brexit deal has been reached by Wednesday, then it will present a motion the following day to allow Parliament to debate and vote on possible ways forward. May will update lawmakers on progress.
  • If no deal is reached on the U.S-Mexico border wall by Friday, U.S. President Donald Trump may shut parts of the U.S. government again.
  • Policy maker speeches include ECB Vice President Luis de Guindos and Governing Council member Philip Lane, Cleveland Fed President Loretta Mester, Kansas Fed President Esther George.
  • Economic releases include U.K. GDP, CPI and retail sales, as well as U.S. CPI, PPI and consumer confidence numbers. See data calendar.

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