The British pound to euro exchange rate rose notably in the week gone by in a move that underpinned sterling's new-found confidence.
- GBP speculative net shorts on the IMM increased to the highest level since June 2013
- GBP/EUR breaks above 50 day moving average, advocates for further advances
- Next obvious area of supply likely to be found at the 100 day moving average
The GBP advanced by over a percent against the euro on the final day of trade in the week gone by.
The GBP to EUR pair rose from an opening rate of 1.2552 on Monday to the 1.2824 we are seeing on Friday; five uninterrupted days of gains.
Of the past 13 trading days only day has seen a decline.
Sterling-euro has also crossed a major technical threshold that advocates for further gains in the week ahead.
GBP/EUR’s advance above the key 50 day moving average which, as we noted here, has really put a fire under GBP as sellers are cleared out of the market.
This is a market that is primarily technically driven in our view; the overhanging threat of an EU exit from the Eurozone has of course been the dominant fundamental theme for some time now, but it is struggling to explain recent price action in GBP.
If anything, we could argue that the negative influence of the EU referendum is waning in its grip on the pound.
The polling data shows the gap to be narrow with a poll of polls at The Telegraph showing Leave at 49% and Remain at 51%.
But markets could be finally getting the message that the pollsters are likely to be wrong and it is the odds market who are most likely to be delivering the better picture.
According to bookmakers, the chances of the UK leaving the European Union are small.
For instance, there is a 73.34% chance of staying in the EU being ascribed by bookmakers PaddyPower. The exact same outcome is being touted by William Hill.
Unless we get a significant shift in the Brexit story, in favour of the exit camp, we find it hard to believe that the issue will continue to play the outsized role it has in the sterling complex witnessed over recent months.
The Market is Cleared Out
The GBP to EUR conversion has shot higher as the hurdle that is the 50 day moving average is surpassed.
The 50 day moving average, shown in gray in the below, is where a significant amount of supply has been found over recent months.
What I mean by ‘supply’ is that traders have often sold the pound against the euro when the 50 day moving average is met in anticipation of the broader downtrend reasserting itself.
This has proven profitable on multiple occasions with a major refection on the 9th and 10th of March confirming this area to be formidable.
However, breaks of such points can often result in an outsized rally as market bets are cleared out. For instance, when sterling broke above the 50 day moving average in October buyers tool the exchange rate all the way to the multi-month highs located just below 1.44.
Could we be about to witness such a move?
We are not sure such a large move will take place this April, primarily because the uncertainty posed by the EU referendum is still with us.
We would rather look for the GBP’s advance to be seriously questioned at the 100 day moving average (the red line in the chart) at 1.2913.
British Pound Outperforms Rivals
The strength in sterling witnessed over the past week will certainly catch some by surprise despite disappointing UK economic data released this week.
No significant economic data was released on Monday, but sterling rebounded strongly from the recent two-year lows against the euro.
Despite the Bank of England (BoE) Governor Carney warning that the BoE could cut interest rates further if required by economic conditions, the British currency continued to push higher across the board on Tuesday.
Wednesday saw the release of disappointing labour and wages data from the UK, with average earnings of 1.8% missing the forecast level of 2.0% growth.
Even though UK retail sales data for March released on Thursday disappointed, sterling continued to push higher hitting fresh three week highs against both the euro and US dollar before testimony from European Central Bank (ECB) President Draghi saw sterling fall away from these highs throughout the afternoon.
We believe the pound is closing its ‘Brexit premium’ - this is the gap between where it should be trading on account of fundamentals and where it is actually trading based on fear.
The gap is hard to define, therefore expect more unexpected moves over coming weeks.
G10: The Winners and Losers
Speculators are still looking to profit on a notable drop in pound sterling according to the latest data from the US Commodity Futures Trading Commission.
Interestingly, GBP speculative net shorts on the IMM increased to the highest level since June 2013, while the speculative net JPY long increased to what i think is an all-time record.
"There is no clever way of trading the CFTC data but they have highlighted how quickly the market view of the yen turned and this week, the weight of positions caught up with the currency, propelling it to bottom place in the G10 rankings," says Kit Juckes, market analyst with Societe Generale.
GBP/USD bears by contrast, stayed short on Brexit fears even as the dollar move widely ran out of steam.
"Both sterling and Gilt bears are now being squeezed out," explains Juckes.
The rest of the G10 move are small, though higher oil prices support NOK and CAD, higher iron ore prices helped AUD a little and the market ignored the Riksbank extension of QE.