On the weekend, the German elections concluded with the incumbent, Angela Merkel’s CDU/CSU party winning the elections albeit losing some votes to the fringe parties. The sentiment in the euro was a bit dented as a result.
Against the British pound, the euro closed last Friday at 0.8833 and opened on Monday at 0.8814. The EURGBP is still to post some recovery following a sharp decline the week before. The market reaction was rather muted following the German elections with the outcome in line with poll projections and market expectations.
With the German elections now a thing of the past, the markets will be looking to the monetary policy actions from the ECB and the BoE. In the backdrop, however, Brexit remains a key uncertain factor for investors.
Moody’s downgrades UK rate to Aa2
Last week, late Friday, Moody’s investor service announced that it downgraded UK’s rating from Aa1 to Aa2. However, the outlook was changed from negative to stable. UK’s senior unsecured bond ratings were also downgraded to Aa2.
The ratings agency said that the outlook for UK’s public finances deteriorated and noted that it expects the debt burden to rise. The ratings downgrade comes in the midst of PM May’s efforts to offer a Brexit bill that would be acceptable to the EU.
In the statement, Moody’s said, “[it] is no longer confident that the UK government will be able to secure a replacement free trade agreement with the EU which substantially mitigates the negative economic impact of Brexit.”
Moody’s was one of the last ratings agencies to downgrade. However, both Fitch and S&P maintain a negative outlook, with their ratings a notch lower at AA.
PM May’s Brexit speech disappointing
Although there was some initial hype surrounding PM May’s Brexit speech given in Florence, Italy last week, the outcome was one of disappointment.
The British pound reacted accordingly by weakening. Many saw the statement to be short on details. The speech was seen as a gauge to see the PM’s approach to Brexit. There has also been an internal division within her party on the progress of Brexit.
ECB Draghi and Carney to speak today
Looking ahead, the economic calendar today will see speeches from the ECB President, Mario Draghi, and the BoC Governor Mark Carney. The speeches could potentially bring about further volatility to the EURGBP.
The markets currently wait for more details from Draghi who signaled in September that a decision on tapering could come in October. Given the strong rally in the euro, it is quite likely that the markets have already priced in a taper that will come next year. However, what remains to be seen if Draghi will do enough to satisfy the market expectations.
Meanwhile, the BoE Governor Mark Carney has also signaled hawkish intentions but guarded. While the BoE’s latest monetary policy statement said that “interest rates will rise soon” Carney was seen later toning down the statement.
He said that Brexit uncertainty would remain a key talking point for the monetary policy. However, the BoE is coming under pressure as inflation has risen 2.9% and threatens to overshoot the BoE’s inflation target by a full 100 basis points. Wage growth, however, has failed to catch up to the surge in inflation.
An increase in interest rates could potentially hamper household spending and consumption which could be detrimental to the UK’s economic growth especially as questions remain on how the UK – EU partnership will evolve.
EURGBP – Upside prevails
The currency pair is seen consolidating near the support zone formed at 0.8750. This was a support level that was previously tested. We also notice the falling wedge pattern that has formed near the support which could suggest a resumption of the trend.
This, however, comes at some downside risk as the lower support can be seen near 0.8653. Still, the upside in the euro is likely to overpower the British pound. While uncertainties loom for the British pound in regards to Brexit and also the BoE’s course of action, the markets are quite certain on what the ECB will do next.
This is expected to play out in the markets with the EURGBP likely to push to the upside as a result.