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Sterling Euro slid to the lowest level in close to two years in April, before staging an aggressive rebound. The pair surged close to six and half cents in the past two weeks, effortlessly breaking above the 50 day moving average and forming a minor uptrend.  Appetite appears to be waning at the one month high, with momentum indicators turning negative from their overbought levels, resulting in the minor uptrend been broken.

Data from the UK has been overall disappointing; the Pound however has taken much of the weak data in its stride. It is becoming clear that data will be viewed as a side show for now, as the markets only preoccupation is with the Brexit vote. The UK trade deficit hit its highest level since records began in 1948 at over 32 billion, as foreign investors showed their reluctance to buy UK assets. This was reflected in the manufacturing PMI which contracted to a 3 a half year low. Retail sales also dropped by 1.3%, showing an unwillingness from consumers to spend as confidence has eroded further. Surprisingly it wasn’t all bad news; inflation posted a 16 Month high in March which could resurrect some of the hawks at the Bank of England. With weak employment figures and wage pressure moderating we doubt that, this is a sign that any increase in inflation will not be permanent and the shadow of a ‘Brexit’ could slow the recovery further even after June 23rd.

The chances of a Brexit have receded recently, as the opinion polls indicate a widening gap between remaining and exiting. The remain campaign has been backed by President Obama and he’s expressed that it may take as long as 10 years to negotiate bilateral trade terms with the US. The Remain campaign appears to have instilled enough of an economic fear to win some of those undecided voters. We must remember these polls are not always accurate and one only has to look back to the Scottish referendum, where those polled and the end result were well out of sync, especially when 20% of participants polled still undecided. Therefore the risk of a Brexit may have diminished, but has not fully disappeared and the recent rally in the Pound could quickly change course if market senses any shift towards the Leave camp.

There were no real surprises from the European Central Bank in April, as they left their policy mix unchanged. ECB President Draghi however reaffirmed his dovish stance but surprisingly reopened the door to further interest rate cuts, as he accepted inflation could turn negative again before picking up in the second half of 2016. The focus had been on delivering easing through the bank credit channel rather than through further cuts and a weaker Euro. The Euro however has already risen 6 cents since the last ECB meeting which could curtail the regions recovery, so some investors are starting to believe that Draghi could be forced to change tactics by attempting to directly influence a devaluation of the Euro once more. Britain’s referendum also poses a major risk for all of Europe and if Britain were to leave this could result in full facture for the Eurozone. There may also be new elections in Europe as Spanish leaders fail to resolve a political stalemate and a migrant crisis which has fuelled nationalism across the continent as it begins to reshape the region. So the Euro which saw strong gains between early March and late April may be in for a natural correction in May.

For Euro Buyers,

Momentum indicators have turned lower; so in the short term the next move is likely lower. Support should be coming in around the 50 day moving average at 1.27 and then 1.25. The GBP may find further support if the polls were to widen once more, and should be enough to propel above the 1.30 level, but beware risks from the referendum have only diminished but not disappeared.

For Euro Sellers,

Earlier this month it was a question of how low can Sterling Euro go? But with the recent turn in the polls it looks like it may have turned into a sell on the dips situation. Short term, momentum has turned lower so look to reduce your exposure but be aware it may be difficult to get near the low we saw earlier this month, as the market is a lot more optimistic of the ‘Brexit’ being averted.  Look for protection in the way of a stop loss above the 1.30 level.

Euro Research Report by Denzil Rickerby

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