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Speculative traders should consider selling the Pound to Euro rate on rallies in anticipation of a renewed decline to 1.1409, according to the JPMorgan FX desk.
GBP/EUR rallied smartly from near six-month lows on Monday as EUR/USD ebbed further from its recent three-year highs and the US Dollar Index climbed off a three-year low in European trade.
The turnaround came after the White House announced at the weekend that it would reduce the tariff charged on some electronics items imported from China to 20% for a period of time, lifting the US Dollar briefly.
“There remains little reprieve in newsflow for the pound with fixed income markets remaining relatively heavy in the long end,” says Taylor Broom, a trader on the FX desk at JPMorgan, in a Monday market commentary.
Above: GBP/EUR at daily intervals with Fibonacci retracements of recent decline indicating possible areas of technical resistance, and shown with US Dollar Index. Click for closer inspection.
“We took a fair bit of profit into 0.87 (-1.15 in GBPEUR) and only have a modest core left. The position makes a lot of sense and we would look to buy the dop around 0.8560 [sell at 1.1560 in GBPEUR},” he adds.
The rebound followed a seven day period in which systematic hedge funds trading through the JPMorgan FX desk sold Sterling “quite aggressively,” in tandem with an exodus of ‘real money’ funds from the Dollar.
Last week’s Dollar sales leaned heavily in favour of currencies from current account surplus jurisdictions such as the Euro Area, Switzerland and Japan in a “reallocation” described as “seismic” by Bloom.
“We have some UK data this week in LFS employment (which admittedly still has zero credibility) and CPI,” Bloom says.”
“A soft one on the latter will certainly see the market get more aggressive on the BoE and language from them of late seems to hint that tariffs could be more deflationary than feared,” he adds.
The rebound in the Pound to Euro rate and renewed speculative interest in betting against it comes ahead of Wednesday’s inflation reading from the UK and Thursday’s European Central Bank interest rate decision.
Wednesday’s inflation report would be unhelpful for the Sterling bond market in the absence of further meaningful progress toward the 2% target, which might not be all that helpful for the Pound either.
However, things might be different on Thursday if the recent rally by large components of the trade-weighted Euro index, its impact on the inflation target and competitive headwinds for Euro Area exports leads the Governing Council to adopt a more dovish policy stance.
Above: Pound to Euro rate shown at daily intervals alongside EUR/USD. Click for closer inspection.