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Trade Idea: EURGBP lower?


29 June 2021

With the changing of the guard, as Sajid Javid replaces Matt Hancock, could the stark differences in their outlook on covid restrictions cause further strength in the pound? Read below to find out more. There was some political drama over the weekend as Matt Hancock resigned due to sordid extra-curricular activities. The rhetoric from his immediate replacement Sajid Javid so far seems to indicate someone more opposed to lockdowns and has an urgency to lift restrictions on July 19, even going as far to say there would be no going back once they were ended.

If this new outlook from the new health secretary informs covid policy going forward then the UK economy could reach pre-covid employment and economic growth faster than anticipated, leading to a hawkish repricing in UK rates. It would also likely lead to an accelerated timeline for policy normalization by the BoE.

The big question mark to the above dynamics occurring is how the labour market reacts when the furlough scheme is ended in September. There isn’t really anything I’m seeing at the moment to make me think the labour market shouldn’t be able to stand on its own two feet without the crutches of furlough. Yes, cases are rising again, but the metric people should be looking at is hospitalizations which the vaccines are very effective at preventing. The UK has now fully vaccinated (both doses) circa 62% of its adult population and continues to power ahead.

In my opinion the best way to express a bullish pound view is against the euro for two simple reasons. They lag the UK in the percentage of their adult population vaccinated and will lag the BoE in terms of central bank policy normalization. The ECB’s monetary policy is firmly anchored due to their historically weaker inflation profile. The one tail risk to this bullish view is the spectre of trade eruptions due to the situation in Northern Ireland which has been averted for now as the grace period has been extended, however, this issue needs a more permanent solution as the current framework is untenable.

Preview

The technicals also are tilted bearish. Price is hovering slightly below the lower trendline of the triangle pattern, which it broke down through. This should act as resistance. Just above that is the 50-day SMA which could cap further price gains. The RSI remains trapped in a tight range between the 41.7 and 52 level, and is running into resistance at the top of that range. For now a short the rallies approach should work well for this cross. On further downside moves I’d monitor the 0.857 level (range support), 0.854 and 0.847 (April low). To the upside look at the 0.86 region (lower trendline of triangle pattern) as well as the 0.8615/0.864 zone (50-day SMA and range resistance).

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