On Tuesday, sterling basically traded sideways against the dollar and initially lost some ground against the euro, as the single currency regained some ground across the board. In the UK, the April CPI came out on the stronger side of expectations at 0.6% M/M and 3.7% Y/Y. Cable reached an intraday high round the time of publication of this figures. However, as this top in Cable coincided with a similar price move in EUR/USD, we doubt that the figure had much impact on sterling trading. In its letter to the Chancellor of the Exchequer to explain the overshoot of the inflation target, BoE Governor King basically reiterated the message from last week’s inflation report. The BoE sees the overshoot as temporary in nature. So, the data are not seen as a reason to withdraw policy stimulation anytime soon. On the contrary, spare capacity in the economy will bring inflation back below target within the policy horizon. So, the BoE is holding on to its soft tone. Later in the session, EUR/GBP lost part of the early gains, but this was rather due to the global euro price move than to sterling strength. After the close of the European markets, the euro sell-off in the wake of the German measures to ban short-selling weighed on EUR/GBP trading, too. EUR/GBP closed the session at 0.8513, compared to the 0.8563 close on Monday evening.
Today, the UK calendar only contains the Minutes of the previous BoE meeting. However, after the publication of the inflation report, we don’t expect any high profile news.
Since mid March, sterling succeeded quite a reasonable performance against the euro. Global euro weakness was the name of the game. The uncertainty on the outcome of the UK elections was no big issue for the currency markets, at least not for the performance of sterling against the euro. Early May, the EUR/GBP cross rate finally dropped below the 0.8600 support, but a real test of this key 0.8400 level didn’t occur. So, despite a loss of confidence in the euro, sterling was not really able to take big advantage of it. EUR/GBP settled in a sideways range between 0.8400 and 0.8650. The need for fiscal consolidation in the UK might be counterbalanced by an ongoing loose monetary policy for quite some time to come. In this respect, the situation in the UK is not that different from Europe. In its May inflation report last week, the BoE indeed indicated that it was in no hurry to tighten monetary policy, on the contrary. In its letter the Chancellor of the Exchequer, the BoE governor also downplayed the inflation risk. From a technical point of view, the EUR/GBP cross rate finally settled in a sideways consolation pattern between 0.8400/24 and 0.8650. Shortterm, we don’t see a trigger for this consolidation pattern to be broken anytime soon. Sustained trading beyond the top of this range is needed to call off the downward alert in this pair. For now, we continue to play this range. After the recent euro selloff, we reinstalled a cautious a buy-on-dips approach for return action higher in this range. We hold on to this tactics for now. To be honest, the developments over the last 24 hours are not really supportive to this tactics, short-term we still see room for some consolidation/correction on overextended euro short positions overall.
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