On a fundamental and technical basis, we believe that EUR/GBP could be headed for near term losses. This is an important week for the euro and the upcoming political / economic events will highlight the region’s vulnerability. Politically, German and Italian politics are in focus. The Social Democrats begin voting on Merkel’s coalition government on Tuesday. They have until March 2nd to file their votes and the outcome will be announced on March 3rd and if they reject the coalition, new elections are likely. In Italy, the Five Star Movement is gaining traction making investors nervous ahead of the Italian elections in 2 weeks. The outcome could have significant ramifications for the Eurozone. Economically, we are looking for softer EZ data starting with Tuesday’s German ZEW survey. It will be difficult for investors to remain optimistic after the nearly 9% drop in the DAX from its high on January 23rd. Sterling has key data on Wednesday but between now and then, we should see GBP outperform EUR after BoE Governor Carney avoided talking about policy.
Technically, EUR/GBP has fallen below the first standard deviation Bollinger Band, signaling potential for a deeper reversal. Although it bounced on Monday, the 100 and 200-day SMAs should cap gains. If we’re right, EUR/GBP could slip down to 88 cents and possibly even lower. Only a break of February high near .8820 negates the downtrend.