What’s Happening?

Following the Brexit vote, EUR soared in value relative to Sterling, but since peaking a month ago, GBP has been recovering driven by recent UK economic data indicating that feared Brexit recession hasn’t materialised after all. Meanwhile, Indices on the continent like the France 40, Italy 40 and Spain 35 have started to recover and appear set to break out of big bases after underperforming their peers for much of the year. 

Technicals:

EURGBP exploded to the upside following the Brexit vote in June. It carried on to a new high in August, but the RSI did not, a negative divergence signalling upward momentum had already peaked. Since then, the pair has been rolling over. Last week the pair took out its 50-day average near 0.8465 to signal the start of a new downtrend. Meanwhile, the RSI breaking under 50 and falling has confirmed momentum turning increasingly downward. Next potential support tests appear near 0.8300 then 0.8170 the 38% and 50% retracements of the previous uptrend. 

 

Like other indices around the world, the France 40 sold off dramatically in late 2015 and early 2016. Unlike its peers in the US and UK, however, France 40 did not stage a big recovery, instead consolidating at a lower level. Back in June, France 40 successfully retested 3,900, completing a double bottom.

 

Since then, the index has been steadily recovering. It has already broken out of a downtrend and appears close to breakout out of a base and over 4,500 with next potential resistance near 4,625 then 4,700.  Most importantly, this rally is not occurring in isolation, the charts for Italy 40 and Spain 35 look very similar. Also, The 50 and 200-day moving averages are getting close to a golden cross which would confirm a similar bullish crossing sign completed by the Germany 30 a couple of weeks ago.   

 

Fundamentals:

During the Brexit campaign the Remain side and their allied had suggested that a decision to leave could cause widespread disruption to the UK economy and a recession, which drive GBP sharply lower on the decision to leave. It turns out that the impact on the economy was small and short and that after a few weeks, the UK economy, which had been doing well into the vote, has been picking up this summer. Recent better than expected UK PMI reports indicate positive momentum for the UK economy heading into the autumn.

Strong UK economic data also indicates that the stimulus measured recently introduced by the Bank of England including an interest rate cut and increased asset purchases may be more than actually needed since the plunge in GBP did a lot of the central bank’s stimulus work for it. Because of this, additional stimulus from Governor Carney looks unlikely in the near term.

It remains to be seen if more stimulus will be needed in the Eurozone but this Thursday’s ECB meeting may give a better ideal. Because of this, and the potential for a divergence in policy going forward, we could see significant trading activity in EURGBP and stocks across Europe and the UK around the decision and press conference with ECB President Draghi. 

 

 

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