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EUR/GBP: Despite Brexit risks, bears remain in charge; But watch the corrective daily doji

  • EUR/GBP is falling with four consecutive bearish closes and is in the realms of an additional bearish close today, but all now depends, or perhaps not, on PM May's no-confidence vote outcome.
  • EUR/GBP is currently trading at 0.8854, down from a high of 0.8890, slightly up from a low of 0.8838.

EUR/GBP has been falling since the 9th January in the build-up towards the Brexit vote, and now, the no-confidence vote in PM May's leadership challenge by Corbyn while the House of Commons takes control of Brexit policy. Despite UK politics being in a' twilight zone', sterling remains bid and the question that many are asking is 'why'? 

The Brexit vote that we had yesterday was a humiliating defeat for PM May, but it actually lead to supply in the cross and sterling demand. The narrative circulated within bank reports and by various media and economists trying to rationalise with the bizarre price action following the outcome is that, in layman's terms, we are one step closer to a proposed soft Brexit resolve. 

Analysts at Rabobank that offered a balanced analysis of the fundamental factors driving the price action following the vote explained some positives that have lent support to the pound as follows:

  • 1) " The first is that the PM is now widely expected to win the no confidence vote that has been tabled by Labour Party leader Corbyn."
  • 2) "Despite the scale of PM May’s loss, she has not resigned."
  • 3) "The expectation that May is now set to seek cross party backing for a new deal is also reassuring for investors since this suggests an effort will be made to find a compromise with broader appeal." 
  • 4) "Also underpinning investor confidence is cautious optimism that a hard Brexit will be avoided - even though that appears to be counter to the legal path that the UK economy is actually on. As it stands there seems to be a lack of support across parliament for a no-deal exit."

However, leading into the vote, no such sentiment was 'floating' around, and the price action following the bearish result for the UK economy was indeed bizarre. 

The UK is in a 'national emergency', but where are the sterling bears? 

Following May's humiliating defeat and a leadership challenge, MP's are describing the situation as a national emergency, yet, sterling remains bid.  The possibility that businesses and consumers now have less confidence as a result of the outcome and the stark possibility of a hard Brexit has all been ignored by 'the market'. Short covering and sell stops have been blamed for the strong rally in the pound. However, that begs the question, where are the sterling bears? 

Last night's defeat was not a small one, Article 50 is still in place, and even PM May has voiced her concerns about delaying the Brexit date, advocating that a no deal is better than a bad deal and that Britain should leave on the scheduled legally binding date. There have been no mentions of the possibility of concession from the EU.  "The Netherlands denied on Wednesday a report that it was pushing with Germany for the EU to make further concessions to Britain regarding the border between Northern Ireland and EU member Ireland, "Reuters" - yet, sterling remains bid. 

The sentiment appears to be that the market finds the idea that the UK parliament would allow the UK to crash out the EU without a deal implausible. The markets are therefore far more confident that a resolution will be found and that a soft Brexit is on the cards despite the progress so far being in stark contrast to such an outcome. However, confirmation that the Brexit start date would be set back could indeed release some of the tension disarrayed parliament, sufficient enough to support sterling at this stage, justifying the market's current position on the pound. 

"In the near-term, EUR/GBP has the potential to pull back to the 0.87 area, and potentially below, if it is confirmed that May will seek a cross-party compromise and push back the start date for Brexit,"

the analysts at Rabobank argued.  

EUR/GBP levels

At this juncture, following a series of bearish daily closes, a bullish corrective doji is in the making which should be a warning to the bears. Additionally, analysts at Commerzbank explained that EUR/GBP’s rally higher was rejected by the previous uptrend, which is now acting as resistance at 0.8991:

"While capped here the market will continue to weigh on the downside. The market is probing the 200-day ma at 0.8862. While this holds on a closing basis, we will assume that the market is still relatively neutral. However, the market has failed to clear the 0.9101 August high, and it is possible that it will prove to be a top and below the 200-day ma will target 0.8810 the low from the end of November. Above 0.9101/20 would target the top of the 2016-2019 channel at .9165. Further consolidation looks likely very near term."

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