The Euro has been in a downward spiral against the pound ever since the start of the pandemic and more so since September 2020. In addition, Europe’s
The Euro has been in a downward spiral against the pound ever since the start of the pandemic and more so since September 2020. In addition, Europe’s proximity to the invasion of Ukraine, both in geography and economically, has only helped suppress it further as the conflict became more widespread.
While we have seen positive news around peace talks before, nothing has come close to a dialogue between the Ukrainian and Russian Presidents which may now be on the table. There have been positive reports from both sides with the Russia’s Medinsky saying, “the talks have been constructive”, while on the Ukrainian front there were reports stating there was, “enough ground to hold Zelinskiy, Putin meeting”. Russia also promised to scale down operations in Kyiv and north Ukraine.
The positive news drove the euro higher across a number of pairs, most notably the pound, which has come under slight pressure after the UK government’s mid-year review of the budget statement. In addition, the pound has been pricing in multiple rate hikes arguably since October/November of 2021, while rates markets are anticipating more then 60 basis points worth of tightening in the Eurozone by the end of this year with the Bank yet to get started. With the timeline for possible ECB rate hikes edging closer, driven mainly by inflationary pressures, such sentiment may encourage the data-led ECB to act sooner than anticipated, acting as a driving force behind the euro.
ECB Implied Rate Hike Odds via Money Markets
Source: Refinitiv, prepared by Richard Snow
On Friday the first of April, the Eurozone is scheduled to release core and headline CPI, with the headline figure forecast to be 6.6% (YoY), up from 5.9% (YoY) last month. Hotter inflation prints create a greater sense of urgency within the ECB to stop asset purchases and begin to hike rates.
Major Risk Event this Week
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Bullish EUR/GBP Conditional Upon Key Level
The bullish EUR/GBP trade is just a number of days in duration, eying to capitalize on the recent bullish advance in the euro. The bullish bias remains constructive as long as EUR/GBP remains above 0.8450. A close and hold (daily chart) opens up a retest of the key 0.8470 mark which previously rejected an advance above that level. The first level of resistance lies at 0.8500 followed by 0.8550.
EUR/GBP Daily Chart
Source: TradingView, prepared by Richard Snow
Risks to the trade appear in many forms, one of those could be a breakdown of the recent progress in peace talks and another appearing in the form of the looming Ruble denominated gas settlement which has up to now been refused by G7 nations.
With Europe reliant on Russia for around 40% of its gas needs, a non-payment would surely lead to heightened supply concerns and higher EU gas prices which has the potential to weigh heavily on the euro, potentially erasing recent gains. Considering these risks, it would be prudent to set a tight stop. Should a move above 0.8470 materialize, support comes in at 0.8450.
— Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
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