Potential EUR/GBP trade continued

EUR/GBP had a whippy ride overnight, falling to a low of 0.7921 before buyers moved in pushing the pair to 0.8020. 

Source: Bloomberg

Following on from my potential trade idea yesterday, on the daily chart EUR/GBP printed a bullish key day reversal highlighting the bulls are in full control here. We could see a continuation of this short-term move and a move through the June 25 high of 0.8034 could see a further squeeze to key horizontal resistance at 0.8157.

I would be focusing on the stochastic indicator on the daily chart, with signs it may reject the 80 level.

From a pure fundamental perspective I feel one has to look at the swaps (OIS) market and current rate expectations. As detailed in ‘trader radar’ this morning, the Bank of England downgraded its forecast for wage growth in both Q4 2014 and 2015, while also mentioning that it will take three years to eliminate economic slack, which was previously stated at two to three years.

Prior to the event, the market was pricing in 67 basis points (bp) of rate hikes from the BoE over the coming twelve months, with expectations now standing at a more modest 54bp. Another way of looking at this is through short sterling futures, a type of interest rate future that highlights interest rate expectations for a certain period. If we look at the March contract, this fell ten basis points to 89bp, which is actually lower than before Mark Carney’s Mansion House speech where he said markets were too complacent on rates.

Given the decline in rate expectations and the real prospects for a rate hike in February, even before I would not take a strong bearish view on sterling from here.

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