Sterling To Book Further Gains

Intermediate
  • EURGBP is in a corrective channel
  • The contrast in vaccine strategy between the U.K and Europe is striking
  • The Eurozone economy is heading toward another recession
  • Sterling is going to continue its outperformance

If one looks at the One-Month chart, shown below in Figure 1, one can see the spot price of EURGBP has shown a rather weak rotation in an impulsive channel that has been in place throughout 2021. This slide has seen spot crash through the 200-day moving average and cling frantically to the 50-Day Moving Average. If one looks at the Time Technicals, it looks like prices will only move higher in the first few hours of Monday trading before collapsing once again.

EURGBP

Figure 1: EURGBP One-Month Chart (USD/Tonne) and Time Technicals                                                                      Source: www.investing.com , Spotlight Ideas

To Jab, Or Not To Jab, That Is The Question

I do not wish to be obtuse, however, it is rather odd that at the start of the week several European nations had halted the use of the Oxford Astra Zeneca (OAZ) COVID-19 vaccine only for a few days later the President of the European Commission, Ursula von der Leyen, to complain that AZ and in effect the U.K. had not been exporting enough of the treatment.

She then resorted to the crude threat of vaccine nationalism. She suggested that even though AZ owns two coronavirus vaccine production sites in the EU; one in Belgium and one in the Netherlands, the EU would block the ability of AZ to export its proprietary product to the U.K.

The plain truth is that whereas the U.S. and U.K. governments invested heavily in partnering with their leading pharmaceutical giants to accelerate the development, testing, approval and distribution of viable vaccines, the EU behaved as a mere consumer seeking the best deal.

This at a time when in the last 14-days in Europe (March 6 – 19) one finds the following statistics re new cases of COVID-19 when comparing the UK with the four leading economies of the EU/Eurozone.

U.K.                    78, 380

Germany         160,847

France             319,032

Italy                 309,289

Spain                 63,320           

In the last two days France and Poland have reintroduced partial lockdowns. Over 21 million people in 16 “departments” of France, including the capital Paris, are affected as the country fears a third wave. The new lockdown measures are set to last at least four weeks.

Meanwhile, there is a growing wave of protest in opposition to new lockdown measures. In Amsterdam, police had to use water cannon to clear protesters from Museum Square, a site often used for unauthorised demonstrations. Then in the central German city of Kassel, police said they used pepper spray and batons to disperse demonstrators who were breaking through police barrier.

The rate of infection in Europe makes the attitude in the EU toward the OAZ vaccine look ridiculous. Despite the European medicines regulator that the OAZ vaccine is safe and effective, some countries remain reluctant to resume their campaigns using the jab.

This intransigence is affecting the economy as the consumer confidence indicator in the Eurozone was confirmed at -14.8 in February 2021 at a time when consumer spending is still 8% lower than pre the pandemic.

The PMI readings in the Eurozone at also shabby as the Services PMI is just 45.7; services account for 73% of the regions GDP.

This reading of the PMI comes as Europe struggles to reopen amid fears of a third wave of COVID-19 infections. The PMI leaves the Eurozone consistent with another contraction in GDP in Q1.

In contrast, the U.K. is gradually reopening supported by the efficient vaccination rollout. This when combined with businesses making a rapid adjustment to the new EU-U.K. trading relationship means that the outlook for the U.K. economy looks much brighter than for Europe. I expect the UK economy will outperform the Eurozone this year.

The Price Path

EURGBP target levels

Figure 2: EURGBP Target Levels                                                                                                                                  Source: www.investing.com, Spotlight Ideas

The trend we saw in Figure 1 is magnified in Figure 2 where one can see the corrective channel in greater detail. There have been two attempts to break the upper limit of the channel and yet the trend has remained intact.

The price path suggests Brexit is beginning to become a rear-view mirror issue and I expect further GBP strength in the next few months with 0.83 on my radar with a stop loss set at 0.865.

Macroeconomic Strategist

Stephen Pope is the Managing Partner of Spotlight Group. He has worked in the world of finance since 1982 and has performed d... Continued

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