Pound UP on May’s conciliatory speech in UK Parliament

At the beginning of this year, many analysts and speculators were betting on the Euro to trade at par with the US dollar. However, the Euro defied such expectations and rallied against the Greenback and other major currencies. The marginal increase in inflationary pressure and an improved economic outlook had assisted the Euro to consolidate and rise against its rivals.

During the past week, the Euro was able to gain ground against the Pound, which had also gained considerably against other major currencies, since the beginning of this year. However, due to the reasons mentioned below, we anticipate the EUR/GBP pair to decline this week from the current level of 0.8580.

As anticipated, the UK’s Prime Minister Theresa May signed the letter to officially trigger Article 50, and begin the Brexit process. The letter was handed over to Donald Tusk, President of the European Council, by the British Ambassador Tim Barrow. While addressing the UK Parliament, May was full of praise for the dignitaries in Europe. Tusk responded to May’s conciliatory tone with a similar comforting message.

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The European Council also stated that it would proceed with the talks in a constructive manner and ensure that the UK continues to remain as a close partner of the EU. Jonathan Loynes at Capital Economics considers the initial response from both sides as positive and co-operative. In fact, considering the political uncertainty in the Europe caused by the rise of anti-EU leader Marine Le Pen and failure of Trump to repeal Obamacare in the US, the scenario has turned favourable for the Pound.

Marvin Barth, currency strategist at Barclays, is also of the opinion that the triggering of Article 50 would lead to a rebound in the Pound as most of the anticipated downtrend has already completed.

The UK’s inflation rate of 2.3% in February is above the Bank of England’s target level. In order to curb inflation, a rate hike can be done. However, analysts argue that it would discourage spending and weaken the economic recovery. Thus, economists believe that the BoE would use verbal intervention to keep the Pound stronger.

According to Credit Agricole, the Pound leads the list of undervalued currencies on the basis of its in-house valuation model. The model uses five criteria for assessment, namely, FX Carry, data surprises, yield momentum, risk-on/risk- off, and positioning. The Euro takes only the fourth position in the ranking of the best bets for long positions. Thus, fundamentally, a downtrend in the EUR/GBP pair can be expected.

The EUR/GBP pair has started declining after facing stiff resistance at 0.8720. The pair is moving within a descending channel by making lower highs. The sharp fall seen in the stochastic reading confirms a loss of momentum in the currency pair. Thus, we can expect the EUR/GBP pair to reach the next major support level of 0.8480.

A short position in the EUR/GBP can be created in the currency market near 0.8580. Large losses can be avoided by placing a stop loss order above 0.8720. The profit can be booked near 0.8480.

A binary trader should look for a put option which expires in a week’s time. The option can be purchased as long as the cross trades near 0.8580.