For the most of November, Sterling Euro was kept in an aggressive uptrend where it advanced by over 4 and a half cents. The market is expecting that the ECB will be forced to add more to its accommodative policy in an attempt to boost anaemic inflation by stimulating the ailing economy. Despite breaking the uptrend Sterling Euro has consolidated near the 8 year high and is likely to remain in consolidation mode as we await the announcement this week.
The Eurozone recovery has been termed ‘fragile’ by ECB officials as they have cited the impact of global economic slowdown led by the developments linked to China and other emerging markets as a real concern. ECB president Draghi has reiterated the central bank has a duty to increase inflation closer to its 2 % target which must be done “as quickly as possible.” The Governing Council has underlined that they will act, if warranted, by using all available tools within its mandate. The ECB current stance of record low rates and quantitative easing is not gaining sufficient traction, so it is rumoured that the ECB are considering further options such as two-tiered bank charges and propping up its 1.1 trillion-euro ($1.2 trillion) asset-purchase programme as they seek to revive inflation in the currency bloc.
The Bank of England have signalled that the need to raise borrowing costs in the U.K has receded given the gloomier prospects for global growth as the they cut their inflation projections. UK inflation remained below zero for a second consecutive month in October. We shouldn’t be alarmed yet as the headline inflation has probably reached its low as the recent drop largely reflects transitory factors that should start to fall out of the annual calculation over the next few months. Wage increases are picking up and skill shortages are increasing, which will give added momentum to price rises through the impact on business costs.
The UK economy however expanded below-trend over the third quarter as net trade dampened quarterly growth by the biggest amount on record as it wiped off 1.5% off the GDP. On a yearly basis, the country’s economy grew 2.3 % which marks the 11th consecutive month of positive growth in the U.K, its longest stretch of growth since the 2009 financial crisis. According to George Osbourne the UK economy will grow even more quickly over the next two years than their previous forecasts had suggested.
This has supported market perception that the Bank of England monetary policy will diverge from the ECBs, which should be a key driver in the Sterling Euro exchange rate in the longer term. The market has almost fully priced in more accommodative measures, so if the markets were left disappointed after the ECB meeting we could see an aggressive correction lower in the short term - classic scenario of buy the rumour sell the fact.
For EUR Buyers
We are back near the 8 year highs; it may be prudent to reduce any near term exposure around the current levels. We only have to look at past price action where the market corrected from 1.4300 to the low 1.30s in the space of a couple of months. Much will depend on what the measures are, but we feel a large portion of any easing is priced in, therefore we may not see that much more upside. The initial level to target would be the 8 year high were it topped out in late July but it would be important to leave a stop loss as protection just below the 1.40 levels which coincides with 61.8% Fibonacci retracement in case we do see that correction.
For EUR Sellers
It is almost certain the ECB will unveil a new form of stimulus but the question remains, how much will be announced? It is likely they will announce something so it may be prudent to still reduce some exposure here and hope for the correction. Unless they announce something completely out of left field the risk/reward should be skewed to the downside (your favour). Protect yourself in the form of Stop loss above 1.4300 in case the ECB do announce that bazooka and the Euro weakens.