EURGBP Daily – Is Parity Inevitable? Earlier today the Euro broke the psychological $1.200 handle for the first time in 2 years whilst and it is now heading towards an all time high against the British Pound.
At the start of the year, analysts had predicted further weakening for the Euro. We are now at the end of August and those predictions could not have been more wrong with the Euro rallying strongly. Despite being overvalued by most indicators, the Euro has continued to strengthen and this is expected to carry on. One of the biggest reasons for this is that the common currency is increasing its appeal to investors and traders as a safe haven.
When analysts talk about safe haven currencies, they are usually referring to the US Dollar, Japanese Yen or the Swiss Franc. However, over the past months, demand for the dollar and yen during risk off sentiments have been lower than usual. For the Dollar, this is due to political uncertainty and the conflict with North Korea. Meanwhile, with the Yen, it is due to the risk from North Korea. As we saw yesterday, a missile fired into the Pacific Ocean by North Korea, flew within Japanese airspace, prompting, Japanese official to warn residents who could have been affected. The majority of global risk has been from the two factors mentioned here, which means that the most attractive safe haven currency left would be the Swiss Franc. However, the current stability in Europe and anticipation of the ECB winding down its large QE programme, has made the Euro a great currency for both investors and traders.
The Euro strength has been mentioned as a concern by the ECB but they have not indicated plans to take any action just yet. Now that EURUSD has broken above, $1.200, traders should expect an ECB official to address this in the coming days but it is still unlikely for them to intervene. The CFTC commitment of traders reports last week also showed an increase in net long positions on the Euro, also suggesting that the rally is set to continue. However, analysts have mentioned that the Euro strength will weigh down on European companies as it becomes more expensive to import from the Eurozone, with the DAX dropping to 5 month lows yesterday.
In the UK, the biggest fundamental factor continue to be Brexit but a lack of progress in talks has actually helped the pound to strengthen. The EUs Juckner is not happy with the position papers handed to the EU from the UK government. UK officials are complaining that the EU are simply being stubborn and currently negotiations look as if they are at a stalemate. The United Kingdom would like the EU to be more flexible and talk about their future relationship, whilst at the same time talking about the separation process. However, the EU are adamant that they will not talk about any future relationship until the terms of their divorce with the UK are resolved. It seems that the biggest hurdle in all of this is the agreement on how much the settlement bill should be, with Brexit secretary Davis saying that the UK will only pay what it is legally obliged to. The current situation is helping to support the pound at the moment but with the BoE not showing any signs of hawkishness, it is highly likely that any appreciation in the Pound is simply a retracement.
Today, EURGBP has broken its 2016 high and we now expect it to reach its all time high at around 0.9800. Following this, Brexit makes it seem inevitable that this pair will reach parity but it will also depend on how long it takes to reach these levels and what impact the Euro strength is having on the Eurozone economy. We will be looking for buys on this pair, ideally after some sort of retracement. However, if we do not get a retracement, we will still looking to enter a smaller position and add on to this along the way.
At the start of the year, analysts had predicted further weakening for the Euro. We are now at the end of August and those predictions could not have been more wrong with the Euro rallying strongly. Despite being overvalued by most indicators, the Euro has continued to strengthen and this is expected to carry on. One of the biggest reasons for this is that the common currency is increasing its appeal to investors and traders as a safe haven.
When analysts talk about safe haven currencies, they are usually referring to the US Dollar, Japanese Yen or the Swiss Franc. However, over the past months, demand for the dollar and yen during risk off sentiments have been lower than usual. For the Dollar, this is due to political uncertainty and the conflict with North Korea. Meanwhile, with the Yen, it is due to the risk from North Korea. As we saw yesterday, a missile fired into the Pacific Ocean by North Korea, flew within Japanese airspace, prompting, Japanese official to warn residents who could have been affected. The majority of global risk has been from the two factors mentioned here, which means that the most attractive safe haven currency left would be the Swiss Franc. However, the current stability in Europe and anticipation of the ECB winding down its large QE programme, has made the Euro a great currency for both investors and traders.
The Euro strength has been mentioned as a concern by the ECB but they have not indicated plans to take any action just yet. Now that EURUSD has broken above, $1.200, traders should expect an ECB official to address this in the coming days but it is still unlikely for them to intervene. The CFTC commitment of traders reports last week also showed an increase in net long positions on the Euro, also suggesting that the rally is set to continue. However, analysts have mentioned that the Euro strength will weigh down on European companies as it becomes more expensive to import from the Eurozone, with the DAX dropping to 5 month lows yesterday.
In the UK, the biggest fundamental factor continue to be Brexit but a lack of progress in talks has actually helped the pound to strengthen. The EUs Juckner is not happy with the position papers handed to the EU from the UK government. UK officials are complaining that the EU are simply being stubborn and currently negotiations look as if they are at a stalemate. The United Kingdom would like the EU to be more flexible and talk about their future relationship, whilst at the same time talking about the separation process. However, the EU are adamant that they will not talk about any future relationship until the terms of their divorce with the UK are resolved. It seems that the biggest hurdle in all of this is the agreement on how much the settlement bill should be, with Brexit secretary Davis saying that the UK will only pay what it is legally obliged to. The current situation is helping to support the pound at the moment but with the BoE not showing any signs of hawkishness, it is highly likely that any appreciation in the Pound is simply a retracement.
Today, EURGBP has broken its 2016 high and we now expect it to reach its all time high at around 0.9800. Following this, Brexit makes it seem inevitable that this pair will reach parity but it will also depend on how long it takes to reach these levels and what impact the Euro strength is having on the Eurozone economy. We will be looking for buys on this pair, ideally after some sort of retracement. However, if we do not get a retracement, we will still looking to enter a smaller position and add on to this along the way.