EURGBP Short: GBP Dependent on Brexit Outcome, Italian Risk Remains

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EURGBP Trading Strategy: Short at 0.8810, target 0.8620 stop 0.8870

  • Trade Risk: Failure to reach a deal at next week’s summit, alongside increased UK political uncertainty and an increased likelihood that the Italian budget will be approved by the EU.

EURGBP Fundamental Overview

GBP: Next week will be key for the overall direction in the Pound with focus on the crucial EU summit (17th-18th). Heading into the summit, speculators are heavily short the Pound with bearish bets at the largest level since May 2017. Consequently, given the recent positive rhetoric from both the EU and UK that an deal is within reach, the Pound could be subject to a notable short squeeze upon a withdrawal agreement. However, even if an agreement is reached by next week, headline risk will remain high if concerns over whether MPs will pass the deal through parliament begin to rise. A notable concession from the UK negotiating table, may be met with critiscism from the key Brexiteers.

EUR: Political uncertainty continues grip the Euro with concerns over the Italian budget proposal at the forefront of investors minds. The Italian government are set to submit the budget into Brussels by October 15th, in which Brussels will have 7 days (22nd) to respond to the budget and 14 days (29th) on whether to accept the budget or not. As such, political risks remains elevated for the Euro. As it stands, European officials have been somewhat critical over the current proposal made by the Italian government, providing downside risks for the Euro, while a similar rhetoric has also been expressed by several rating agencies, in which both S&P and Moody’s are set to rate Italy’s sovereign debt towards the backend of the month. A downgrade from either Moody’s and S&P would take Italian debt to 1 notch above junk status and would likely see a widening of the Bund-BTP spread and thus keeping the Euro on the backfoot.

Another risk for the Euro is the upcoming German state election in Bavaria. The Election will take place over the weekend (14th) and the result may mean more negative news to Chancellor Merkel. The fear is that the CSU could lose its absolute majority amid the rise in populism and anti-government sentiment with support rising for the far-right Afd party.

EURGBP Technical Overview

Resistance 1: 0.88 (Psychological)

Resistance 2: 0.8840 (200DMA)

Resistance 3: 0.8847 (Sep 20th low)

Support 1: 0.8750 (Psychological)

Support 2: 0.8692 (61.8% Fibonacci Retracement)

Support 3: 0.8666 (Mar 22nd low)

EURGBP PRICE CHART: Daily Time Frame (March-October 2018)

EURGBP Short: GBP Dependent on Brexit Outcome, Italian Risk Remains

Chart by IG

— Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX