When it comes to the $5.3T/day foreign exchange market, speculators account for a clear majority of daily volume, but occasionally, demand from actual users can still have a major influence on the market.
One prominent example of this effect emerges during large international mergers and acquisitions, when a company in one country must acquire a significant amount of another country’s currency to buy a firm domiciled there. A more benign example of this type of phenomenon occurs with the UK’s monthly contributions to the European Union. These payments require the UK to sell pound sterling and buy euros around the end of every month, to the tune of around EUR 1B each month.
Of course, month-end flows alone are never the only explanation for a market movement, but they can start the proverbial snowball rolling in a certain direction or add fuel to a preexisting fire, to mix two incongruent metaphors.
In the case of EUR/GBP, rates have carved out a clear range between resistance near 0.9000 and support near 0.8700, with the pair forming clear reversal candlestick patterns (“shooting stars” and “piercing candles” respectively) on tests of those key levels. Last Thursday, bears tried to push the pair through support at 0.8700 but were met with strong buying pressure, creating a clear “bullish pin” or “hammer” candle.
Sellers below that key level were trapped in losing positions, making conditions ripe for the relatively small amount of month-end buying pressure to drive the pair notably higher this week.
With another strong rejection off established support, the path of least resistance for EUR/GBP is to the topside for now, with bulls potentially eyeing a return to the top of the range in the 0.8900-0.9000 level. On the other hand, if EUR/GBP sellers can push rates down to break and close below last week’s low, perhaps on the back of positive Brexit news or caution on the part of the ECB, the door would open for the pair to take a significant leg lower, potentially toward the 2017 lows around 0.8300.