Euro Weakens On Decline In Sentix Investor Confidence

Euro Weakens On Decline In Sentix Investor Confidence
March 8, 2018

 
The Euro has rallied nearly 200 pips against the British Pound in the past one week, despite a strong rebound in the UK construction sector in February. The Brexit related uncertainty tops the list of reasons given by the Deutsche bank and HSBC analysts for the poor performance of the Pound. Additionally, analysts have pointed out the current account deficit, which has risen to 5% of the UK’s GDP, as the next major reason for the Pound’s weakness. Analysts also suspect that the Bank of England will be able to hike rates only at a slower pace than anticipated. All these facts have led the rally in the EURGBP pair, which touched a high of 0.8967. However, we expect the Pound to regain ground in the short-term due to reasons given below.

The final IHS Markit Euro zone services PMI declined to a three-month low of 56.2 in February, from 56.7 in the earlier month. Economists had expected services PMI reading of 56.7. Likewise, the final IHS Markit Eurozone PMI  Composite Output Index recorded a four-month low of 57.1 in February, down from a 12-year high of 58.8 in January, and lower than analysts’ expectations of 56.7.

In March, the Sentix Investor Confidence index fell by 7.8 points to 24, from 31.9 in the previous month, and lower than 31.1 anticipated by analysts. A deterioration in German investor confidence led the decline. Furthermore, the US President Donald Trump’s plan to impose additional tariffs on steel and aluminium has also added to investor woes. While the Eurozone economic data indicate a slowdown,  the recent UK economic data indicate a comeback.

According to IHS Markit Economics, the UK Services PMI rose to 54.5 in February, from 53 in January, and greater than 53.3 expected by analysts. It is the highest recorded Services PMI since May 2017. The survey also reflected robust job market across the services economy as companies sought to boost operating capacity in response to an increase in backlog.

As expected, the EU negotiators continued to toe a tough line in Brexit talks. However, there were a lot of positive signals as well. Donald Tusk stated that the EU “does not want to build a wall.”  Furthermore, while unveiling draft guidelines for the EU side, Donald Tusk stated that the 28-member economic zone is looking for an advanced free trade agreement with zero tariffs on goods. In return, according to the President of the EU Council, the UK’s service sector will have access to the European markets. However, there was no mention of financial services. The UK Chancellor Philip Hammond had earlier called for financial services to be included in any future trade agreement.

In the meanwhile, Zoltan Kovacs, Hungary’s Secretary of State for Public Diplomacy, warned Brussels to drop attempts to punish Britain in negotiations. Kovacs also opined that Brussels’ failure had caused Brexit and a good deal is a must for parties on either side of the English Channel.  Therefore, economic data is expected to strengthen the Pound against the Euro in the short-term.

The EURGBP pair is declining after facing resistance at 0.8950. The Williams’ Percentage Range indicator has formed a negative divergence with the price. Therefore, we are expecting the EURGBP pair to decline in the short-term.

EURGBP - Technical Analysis - 8th March 2018

Based on the analysis, we may establish two trades, one each in the Forex and binary market. In the Forex market, we are considering going short near 0.8940, with a stop loss order above 0.9040. We would consider booking our profit near 0.8660.

In the binary market, a put option may be bought to gain from the anticipated decline in the EURGBP pair. The option contract may be bought only when the currency cross is trading near 0.8940 in the Forex market. Furthermore, the contract should have an expiry period of one week.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

Sammy

Sammy

Sammy is our forex expert, with over 20 years experience in the financial sector, she will be keeping you up to date with the ups and downs of currencies around the world


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