EURGBP in focus ahead of BoE

Ahead of the Bank of England’s monetary policy decision on Thursday, the pound is little-changed at the time of this writing. The GBP/USD continues to hover around the 1.29 handle, while the EUR/GBP is down for the fourth day. The cross has nearly filled the gap that was left behind after the first round of the French election.

Sentiment towards the pound has improved ever since the shock Brexit vote last summer. Surprisingly resilient economic data in the face of Brexit worries has led to a reduction in record bearish bets against the currency.

Recently, the pound got another shot in the arm on the back of the announcement for a snap general election by UK Prime Minister Theresa May, scheduled for 8th June. Political analysts and economists alike think that in calling for an election early, Theresa May wants to consolidate her position and secure a solid mandate to deal with difficult negotiations with the European Union. Market participants have welcomed this move because in theory it will reduce some uncertainty, especially given the likely outcome of a Conservatives victory.

Meanwhile, Thursday’s monetary policy decision from the Bank of England will likely cause some short-term volatility in the pound. But ahead of the election and amid mixed-bag – but generally positive – data, the BoE is highly unlikely to deviate from its current neutral bias, but will almost certainly maintain interest rates and QE unchanged. Thus, if we do see any surprises it will either be in the quarterly inflation report or in the minutes, specifically with regards to the breakdown of the vote – will another Monetary Policy Committee member join Kristin Forbes in voting for a rate rise?

But as far as the EUR/GBP is concerned, the pressure is growing for a potential breakdown soon. The cross has nearly filled the void from a couple of weeks ago, and for that reason, we expecting small bounce from the 0.8370/85 area. But if and when this support level gives way, we are expecting a run down to the next support area around the 0.8300 handle. Given the number of times this level has already been tested, a breakdown is what we are anticipating to see. However, if the key resistance area around 0.8480-0.8530 gives way first then we will have to drop our bearish bias. But in the event of a breakdown, we will then be looking for a swift move lower given the inefficient manner in which price had rallied in the past.