Barring a few instances, the EURGBP pair has remained range-bound between 0.8780 and 0.8980 for the past three months. Even though the Eurodollar gained considerably against the greenback, it was unable to reign over the Pound. That is because the Pound is fundamentally undervalued. The UK economy has defied expectations of a decline anticipated by economists.
The strong consumer spending, albeit showing a little weakness recently, continues to drive the UK economy. Therefore, the Euro is unable to gain ground against the Pound, despite a firm recovery in the Eurozone. The Pound, on the contrary, may strengthen against the Euro due to the reasons given below.
According to analysts, the EU will certainly consider extending the transitional Brexit period beyond the December 2020 deadline, if required. William Anderson Jones, head of the UK Corporate Dealing at Rational FX, pointed out that the idea was raised at the meeting of ambassadors representing the 27 EU countries.
Secondly, a Reuters report indicates that influential European regulators will soften their stance regarding the clearing-houses in the City of London. In June last year, the European Commission gave more powers to itself, the European Central Bank, and the European Securities and Markets Authority for deciding the fate of clearing-houses located outside the bloc. With the powers they have, the regulators could force the clearing houses in London to shift to Europe.
However, chair of the constitutional affairs committee of the EU legislature, Danuta Hubner told Reuters “We don’t want to give those bodies this right to use total discretion in deciding what is cleared where.”
The Hubner’s report will be taken for voting by the Parliament in January. Hubner is confident of getting her amendments passed in the Parliament. If the report gets the backing of the Parliament, then the financial industry would certainly welcome it, as forced relocation would increase trading costs, weaken the status of the euro, split markets, and threaten thousands of jobs.
In the meanwhile, a Bloomberg report revealed that finance ministers of the Netherlands and Spain are in support of a deal that would keep Britain closer to the trading bloc. However, officials from those ministries have denied the report. Still, the market is assuming that things are moving in favor of the UK.
Sensing a strong rally in the pound, analysts at Société Générale have cautioned their clients to be prepared for unforeseen strength in the pound sterling in 2018. The Euro is perceived to be overvalued, compared to the Pound. Thus, fundamentally, we expect the EURGBP pair to decline in the days ahead.
Technically, the EURGBP pair is moving along the descending channel, as shown in the image below. The Williams’ Percentage Range is also indicating an overbought scenario. Therefore, we are expecting the EURGBP pair to decline in the days ahead.
To gain from the downtrend, we may go short in the EURGBP pair at 0.8900, with a stop-loss order above 0.9060. An order to book profit will also be placed at 0.8740 levels.
Additionally, we may also purchase a put option contract to trade the predicted bearish trend reversal. The option will be bought when the pair trades near 0.8900. Before opening the trade, we will make sure that the option offered by the binary broker is valid at least until January 24.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
