EURGBP Should Move Higher From Here From Lack Of Stimulus

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Includes: FXE, UDN, UUP
by: D. H. Taylor

Summary

GBP has firmed significantly from earlier highs.

No expectation of movements lower from these levels so should see the cross trend higher.

Risk is that ECB announces end of stimulus and that EUR shoots up higher.

I have been shorting EURGBP to a great effect over the past several months. I have been very profitable getting in-and-out of the market on the short side. While EURGBP has firmed as of late, several developments over the past few weeks have prompted me to take my profits from the latest downward moves in EURGBP and I am going to wait to get back in. I believe EURGBP will head higher for a moment, however, I do not have conviction to be on the long side. Eventually, I want to short again, but not any time soon.

First, and I have written prolifically on this subject of late, there are severe changes underway in the economies of the world. My short trade on EURGBP had more to do with the currency rallying based upon the Brexit oversell. Up front, there has been largely no fallout from the Brits exercising Article 50. In fact, that is a 2-year process and it might take that long to actually see the divorce proceedings conclude. In the meantime, and, oddly, even after Brexit, central banks prefer pounds over euros.

British pound is one of the soundest, oldest and most stable currencies in the world. I cannot say the same for the EU. Instead, I think the goose may be cooked with the EU. A Le Pen victory, which is looking far more eminent in the first round with a high probability, although, admittedly, no certainty, in the second round, may very well spell the end of the EU. Populism is everywhere in the world and the very first obvious salvo was Brexit, the second being the United States and now France looks like it is next.

Interest rates in the United Kingdom outweigh those of Europe. The yield in the United Kingdom for the 10-year government bond is 1.07% versus the German bond at 0.21%. Where would you invest over the next 10 years?

However, I think there are going to be reasons that the interest rate differential that has played into the EURGBP flows lower, is now subsiding. Interest rates are heading back down. I expect this to be a major factor around the world.

First, inflation rates have tempered in the United Kingdom. This is far from earth-shattering news. But, it may be emblematic of a move that is about to have far greater consequences. It is looking that the United States economy is slowing down. This changes a lot of the outlook around the world. The United States has been the engine of the world's growth, albeit being more akin to a 50cc Vespa. There was a whole lot of confidence after the election. There is no data supporting an economy moving forward, however.

As I mentioned, I was shorting EURGBP on a regular basis . Every time there was any kind of move upward in the currency, I hit the sell button. Since the currency was largely moving sideways, and since I was only looking for smaller trade profits, I was consistently profitable. On the latest move downward from the .8750 level I held on to the trade a little longer than normal. I am out at this point.

Instead, I am looking to go long on EUR for longer trades. At some point, and in consideration of the pressure that the ECB is getting from Germany, the ECB will announce the end of the stimulus. EUR will move higher off of this news. I do not want to be on the wrong side of that trade. Then, once that move settles in, I will be a steadfast seller of EURGBP once again.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.