Europe will manage to survive

EUR/GBP

Key zone: 0.8630 - 0.8670

Buy: 0.8700 (on strong positive fundamentals) ; target 0.8820; StopLoss 0.8640

Sell: 0.8600 (on a pullback after retesting 0.8650) ; target 0.8450; StopLoss 0.8660

Despite the difficult economic and political situation — both global and domestic — most of the news background in recent weeks has worked against the British currency and in favor of the dollar. Even those macroeconomic data that could have supported the growth of the currency pair were often ignored by the market due to the dominant geopolitical factor.

Thus, the conflict in the Middle East has become a kind of final blow to the positions of GBP.

At the same time, the pound received short-term support amid a revision of investor expectations regarding the policy of the Bank of England after the recent volatility in the oil market. Analysts of the regulator link what is happening to the repricing of yields in the debt market and the continuing uncertainty regarding the duration of the energy crisis.

Reminder

• The yield curve for assets denominated in GBP has experienced one of the most notable repricings in recent times, triggered by the oil shock.
• Inflation in the United Kingdom already significantly exceeds the target benchmark of the monetary regulator and stands at around 3%. At the same time, within the BOE there remains a significant number of supporters of a more restrictive monetary policy who could potentially halt the current easing cycle.
• The key factor for the further development of the situation remains the duration of the oil shock. If it turns out to be prolonged, the discussion about further steps in monetary policy will noticeably intensify.
• At the same time, the risk of pressure on the government bond market is increasing. Possible government measures aimed at mitigating the consequences of the energy crisis for households may increase the budget burden. Nevertheless, the authorities still have a certain time reserve to respond.

There is also another important factor specific to the British market. Utility bills are formed during the period from February to May, while consumers receive the actual payments only in July. This means that the main reaction of households and the economy to the energy shock is still ahead.

The government expects that by the time new energy limits are introduced, prices for natural gas and electricity will have time to decline significantly. Such a scenario would make it possible to reduce pressure both on the budget system and on the debt market.

What is worth paying attention to

• It is important to carefully monitor signals from the BOE, primarily the distribution of votes in the monetary policy committee and possible changes in interest-rate forecasts. The appearance of additional “hawkish” votes may increase the probability of a pause in the current easing cycle.
• No less important is the dynamics of prices for natural gas and electricity, as well as statements by the government regarding possible tariff restrictions and subsidy programs. Such fiscal measures may exert pressure both on the bond market and on the exchange rate.

And what is the result?

The recent strengthening of GBP against EUR is probably partly related to a more hawkish revision of interest-rate expectations in the United Kingdom, as well as to the relatively stable dynamics of stock markets.

However, the decline of the EUR/GBP rate after the beginning of the Middle Eastern conflict appears somewhat excessive. If the price of oil falls below the level of $90 per barrel, this may trigger a corrective recovery of the currency pair. In that case, a return to the level of 0,870 appears to be a more likely scenario than a further decline to the level of 0,860.

So we act wisely and avoid unnecessary risks.

Profits to y’all!