EURGBP Jumps as Fortunes of Euro and Sterling Diverge

Market overviews

Swiss Franc and Euro remain the strongest ones together. They’re riding on the expectation that ECB will finally announce to quit the asset purchase program next week. Meanwhile, Sterling starts to lag behind and suffers some heavy selling today. Brexit uncertainty is back in spotlight, in particular the stick issue of Irish border. Australian and Canadian Dollar also turned weak while US Dollar is getting no love ahead of the G6+1 summit in Canada.

Technically, EUR/GBP’s break of 0.8808 resistance is a key development today. This could finally make the end of a month long consolidation. But break of 0.8844 resistance is needed to confirm. Otherwise, it’s just another false breakout. 0.8844 will be a focus for the rest of the day.

US initial jobless claims dropped 1k to 222k in the week ended June 2, below expectation of 225k. The four week moving average rose 2.75k to 225.5k. Continuing claims dropped -6k to 1.72m in the week ended May 26. Four week moving average of continuing claims dropped -13.25k to 1.72875m, lowest since December 8, 1973.

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Released earlier, Eurozone GDP was finalized at 0.4% qoq in Q1, unrevised. German factory orders dropped -2.5% mom in April. Swiss unemployment rate dropped 0.1% to 2.6% in May. Swiss foreign currency reserves dropped to CHF 741b in May. Australia trade surplus narrowed to AUD 0.98B in April versus expectation of AUD 1.03B. Japan leading indicator rose to 105.6 in April.

UK May had constructive talks with Davis over backstop plan

UK Prime Minister Theresa May and her ministers will meet today to try to conclude on a “backstop” plan for Irish border after Brexit. The current proposal is believed to tie UK to EU customs union after a transition period. Based on current information, May could have conceded to an end date for the backstop plan. And the “harder” Brexit is not too welcomed by the market.

It’s widely reported that Brexit minister David Davis is at odds with May over the the proposal because of the lack of end date. Davis also threatened to quit over the disagreement. May’s spokeswoman said today that May and Davis had “constructive talks”. And it’s rumored that nobody will resign from the UK government today over Brexit.

Looking ahead, June 28-29 EU summit is an important deadline by which UK has to give an agreeable answer to EU regarding the Irish border. For now, it’s highly unlikely for this to be met. Instead, the decision could be delayed to October 17-18 EU summit. But at the same time, October is the deadline for agreement the divorce bill and terms. So, tough time ahead for May for sure.

Euro extends rally on ECB expectations

On the other hand, Euro continues to shine on expectation that ECB could finally announce the end of the asset purchase program next week. It’s generally believed that expectations are well in place that the EUR 30b per month asset purchase will end this year. And more importantly, ECB policymakers wouldn’t want to upset such expectation. The question is whether the program will end after September or December. Recent stronger than expected inflation data is pushing the chance towards September. This is also helped by receding political risks in Italy. The expectation was also affirmed by ECB chief economist Peter Praet that policy makers will have a judgement call next week.

German 10 year bund yield’s rally this week is a clear reflection of the situation. It reached as low as 0.186 at the height of Italian political turmoil last week. But today, it breaks 0.5 handle to as high as 0.520. It’s back at the pre-Italian crisis support level and we’ll see if it can push through 0.5 with conviction.

Trump to fight for the US at G6+1 against its allies

G7 summit will be the key focus towards the weekend. It’s turning out to be a G6+1 with Trump against all the supposed US allies. French President Emmanuel Macron and Canadian Prime Minister Justin Trudeau expressed their unified stance on the push for “strong multilateralism” after meeting in Ottawa yesterday. The G7 meeting is set to be a confrontation between G6 versus the US on a range of issues, in particular, the US steel and aluminum tariffs on its closest allies. Trudeau said there will be ” frank and sometimes difficult discussions around the G7 table, particularly with the US president on tariffs.” Trump appears not backing down on his protectionism as he tweeted that he’s “Getting ready to go to the G-7 in Canada to fight for our country on Trade (we have the worst trade deals ever made)”.

EUR/GBP Mid-Day Outlook

Daily Pivots: (S1) 0.8748; (P) 0.8769; (R1) 0.8798; More…

EUR/GBP surges to as high as 0.8837 so far today and the strong break of 0.8808 resistance argues that rise fro 0.8620 is ready to resume. Intraday bias back on the upside for 0.8844 resistance Decisive break there will confirm our bullish view and target 0.8967 cluster resistance (50% retracement of 0.9305 to 0.8620 at 0.8963). On the downside, below 0.8776 minor support will dampen the bullish case again and turn bias neutral.

In the bigger picture, for now, the decline from 0.9305 is seen as a leg inside the long term consolidation pattern from 0.9304 (2016 high). Such consolidation pattern could extend further. Hence, in case of strong rally, we’d be cautious on strong resistance by 0.9304/5 to limit upside. Meanwhile, in another decline attempt, we’d expect strong support from 0.8116 cluster support (50% retracement of 0.6935 to 0.9304 at 0.8120) to contain downside.

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
01:30 AUD Trade Balance (AUD) Apr 0.98B 1.03B 1.53B 1.73B
05:00 JPY Leading Index CI Apr P 105.6 105.6 104.4
05:45 CHF Unemployment Rate May 2.60% 2.60% 2.70%
06:00 EUR German Factory Orders M/M Apr -2.50% 0.70% -0.90% -1.10%
07:00 CHF Foreign Currency Reserves (CHF) May 741B 757B
07:30 GBP Halifax House Prices M/M May 1.50% 1.10% -3.10%
09:00 EUR Eurozone GDP Q/Q Q1 F 0.40% 0.40% 0.40%
12:30 USD Initial Jobless Claims (2 JUN) 222K 225K 221K 223K
14:30 USD Natural Gas Storage 87B 96B