(Bloomberg) -- The euro's troubles versus the pound may start fading as a new wave of risks looms for sterling.
The common currency touched its lowest level versus the pound in five months this week following the U.K. Parliament's decision to support in principle Prime Minister Boris Johnson's Brexit deal. It may be time for a correction as the prospect of a U.K. election should hurt sterling sentiment.
Headline risk has now turned negative for the pound as price action Thursday showed. Sterling slipped to the lowest in a week versus the greenback amid news Johnson will ask Parliament to approve an early general election on Dec. 12. While polls suggest that a Tory-led government is the most probable outcome, traders may seek to hedge market-adverse scenarios and either trim long pound exposure or go short on sterling.
To make things worse for pound bulls, uncertainty prevails on the type of Brexit extension the European Union is willing to offer. EU diplomats want to know whether an election will actually take place before reaching a decision on the length of an extension, while the U.K. opposition party Labour says backing an election depends on the EU decision.
Technically, the euro is set to form a candle pattern on the weekly chart that suggests a short-term bottom is in place. The last time a so-called bullish harami was formed, the euro rose by 1% the following week. Volatility options reflect this upside risk for the currency pair, as bets benefiting from a stronger euro are trading at a premium.
What to Watch:
- FOMC rate decision and Fed Chair Jay Powell news conference on Wednesday, Oct. 30; market has almost fully priced in a 25 basis points rate cut
- Bank of Canada is expected to keep rates steady the same day; Governor Stephen Poloz gives press conference
- Bank of Japan rate decision and Governor Haruhiko Kuroda news conference on Oct. 31
- Policy maker speeches coming up include Bank of England Governor Mark Carney and policy maker Silvana Tenreyro; ECB Governing Council member Olli Rehn and Executive Board member Sabine Lautenschlaeger; Swiss National Bank President Thomas Jordan
- Economic releases include euro-area growth and inflation; U.S. payrolls, personal spending; Sweden and Norway manufacturing PMI; see data calendar
- NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
To contact the reporter on this story: Vassilis Karamanis in Athens at vkaramanis1@bloomberg.net
To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net, Neil Chatterjee
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