(Bloomberg) -- The euro's consolidation against the pound could be in for a key test next week amid emerging policy dynamics that have the potential to widen the trading range.
The common currency may draw more support from the the European Central Bank's relative ease with its trade-weighted value, especially with policy makers including Peter Praet and Ewald Nowotny steering clear of a dovish tone in recent comments. In comparison, the Bank of England's outlook remains too clouded by Brexit unknowns to benefit sterling.
While the BOE is seen staying put at its Feb. 8 meeting, any reiteration by Governor Mark Carney that monetary policy's reliance on data is overshadowed by Brexit could temper bets that pushed the odds of a June rate increase to 50 percent. British and European officials are concerned that a deadline next month to pin down the crucial transition deal may slip, according to people familiar with the situation. Still, the U.K. central bank's comments and the quarterly inflation report next week may be of some influence in shaping rate expectations.
Against this backdrop, investors could stay on the sidelines or trim long-pound positions until the European Union summit in March where progress on Brexit talks may be actually achieved. A round of talks is scheduled for next week, and the EU is expecting an “update” from the U.K. on the future relationship on Feb. 9. Add the persistent political turmoil in London to the mix and the common currency may well be ripe for a rebound from its recent 0.87-0.89 range versus sterling.
At least option traders seem to think so. The cost to hedge euro gains has risen from a week ago, especially in the front-end, with prices getting more bullish on the single currency further out the curve.
On charts, investors with long-euro positions need the technical support at 0.8650-0.8700 to hold in order to challenge the upside of the downward slopping trend channel initiated in mid-October. The support zone contains the 61.8 percent Fibonacci retracement of the euro-sterling pair's 2017 rally and the lows seen since June. Resistance is currently seen at 0.8900-0.8930.
Whether you are a euro bull or a pound advocate, patience could be the name of the game in the short term, at least until the recent range is breached on a closing basis.
What to Watch:
- A self-imposed weekend deadline comes for German Chancellor Angela Merkel to conclude discussions on a coalition pact with the Social Democrats
- ECB President Mario Draghi presents annual report to the European Parliament on Monday, Feb. 5
- The Reserve Bank of Australia meets the following day; officials have been highlighting that low wage growth is an obstacle to raising interest rates
- On Feb. 8, U.S. government funding will run out again without congressional action; a stopgap spending bill to prevent another government shutdown may be in the cards
- ECB speakers include Praet and Daniele Nouy, head of the central bank's Supervisory Board; Federal Reserve speakers include St. Louis Fed President James Bullard and Dallas Fed president Robert Kaplan
- A generally light data calendar: PMIs out of the euro area, U.K. and the U.S. due; see data calendar
To contact the reporter on this story: Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net.
To contact the editors responsible for this story: Ven Ram at vram1@bloomberg.net, Anil Varma, Scott Hamilton
©2018 Bloomberg L.P.
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