If Brexit concerns ease then the pound could regain its poise again, leading to fresh falls for the EUR/GBP next week. Otherwise, the rally could resume now that the Chunnel has reached a critical technical level...
With the US markets closed in observance of Independence Day, it may be a quieter session in the afternoon. So, the focus will remain on the European markets as US investors will be away for a long weekend break. Data released from Europe this morning has been stronger than expected, although equities still fell following Thursday’s gains with the FTSE down about 1 percent, while the pound also weakened. This could well be because of profit-taking, so a rebound in the afternoon could not be ruled out. There are also some renewed concerns over Brexit, but so far, the pound has not reacted too negatively to suggest it is a major issue for investors. However, the FTSE has underperformed this week, which suggests otherwise.
Global services PMIs improve
Following the release stronger-than-expected Chinese services PMI, activity at European services industry also topped expectations with Spanish flash PMI unexpectedly rising above 50, while the French, German and Eurozone’s PMIs were all revised higher. UK’s PMI was revised slightly higher too.
Serious divergences remain in Brexit talks
However, given the lack of a positive response to the above data, it could be that investors are focusing on Brexit again while concerns over coronavirus linger. On Thursday, trade negotiations with the European Union ended earlier than expected. Michel Barnier, the EU’s chief Brexit negotiator said that “serious divergences remain.” However, officials have denied the early finish was a sign that talks have collapsed, and discussions will resume as planned next week.
EUR/GBP testing key 0.90 level
It will be interesting to watch the EUR/GBP closely next week, as it fell for most of this week before rebounding slightly on Friday. The UK economy is set to open further this weekend and the government is expected to announce that people arriving in England from several European countries will no longer have to observe a two-week quarantine. So, if concerns over Brexit ease somewhat then the pound could regain its poise again, leading to fresh falls for the EUR/GBP next week. Conversely, if concerns intensify then the rally could resume now that the Chunnel has reached a critical technical level:
Source: TradingView.com and ThinkMarkets
As per the chart, the EUR/GBP was testing its long-term bullish trend line around the psychologically-important 0.9000 handle after this week’s falls. Here, we also have the 21-day exponential moving average converging as well, making it a critical level. With the longer-term trend being bullish and given the Brexit and other risks, a rebound here would not come as surprise to me. The bulls need to wait for a bullish-looking daily candle here to confirm that support is strong. However, in the event of a clean breakdown then we could see a sharp move lower as investors rush to exit their positions. Whatever happens, the next directional move from around 0.9000 could be sizeable, potentially providing decent trading opportunities in the direction of the move.