Pound Outperforms Euro as Expectations Grow Ahead of Inflation Report

“The only price action of note in today's trade was the further collapse of EUR/GBP cross which hit lows not seen since 2008 as it broke below the .7400 level.” - Boris Schlossberg at BK Asset Management.

The euro has plumbed fresh lows against the pound sterling as the market positions itself aggressively ahead of the all-important Quarterly Inflation Report (QIR) due to be delivered by the Bank of England on Thursday.

The declines in the euro were exacerbated by the angst amongst traders concerning the Greek debt crisis.

“The only price action of note in today's trade was the further collapse of EUR/GBP cross which hit lows not seen since 2008 as it broke below the 0.7400 level. The pair is under pressure not only because of the political tensions in Europe but due to sharply divergent monetary policies of the two regions,” Boris Schlossberg at BK Asset Management tells us.

Divergence in Policy

Even without the threat of Greek Eurozone exit the ECB policy is likely to remain highly accommodative for the foreseeable future as the Eurozone struggles with deflation with over a trillion euro’s worth of currency committed to the markets by September 2016.

In the UK on the other hand the BOE has been decidedly more hawkish repeatedly stating that the central bank will return to normalisation despite the low inflation readings.

“The move today may have been exacerbated by the growing angst over the crisis with Greece, but it is also reflective of the broader trend in the market as capital moves towards sterling and away from the euro,” says Schlossberg.

Bank of England Hawks Must Have Their Say

The highlight of the month for the British pound exchange rate complex will no doubt be the QIR, due to be delivered on Thursday.

Shaun Osborne at TD Securities tells us he maintains a positive outlook on the GBP:

“The GBP is out-performing today and has been the top-performer over the past week as markets position for a hawkish outcome to Thursday’s Quarterly Inflation Report.  

“Our base case is that the outcome will indeed provide support for the GBP as the Bank focuses on the positive outlook for inflation, based on the stimulus for consumption and growth from oil and looks through near-term inflation weakness.  

“We like the GBP’s outlook on the crosses—GBPCAD moving to new highs above 1.93 today keeps the tone here very positive, for example.  

“We target a move up to 2.02 and think that a sustained push above 1.92 (major retracement resistance) through the close of the week will keep the technical position here very bullish from a longer-term perspective.”

The continued rise in the pound sterling does leave it looking overbought and therefore the risk of a pullback has grown.

Any disappointments at the Bank of England could well trigger a massive short-covering move.

The correction could be deep, however the longer-term picture ultimately favour sterling.