• EUR/GBP has dropped substantially since 13 October
• Strategically, we remain bearish on EUR/GBP
• Tactically, we take profit on the trade prior to the ECB meeting
Strategy
On 13 October we recommended selling EUR/GBP on continued UK growth and relative monetary policy due to a BoE rate hike in Q1 16 and ECB QE extension (see Danske Bank FX Trading Portfolio: Sell EUR/GBP). EUR/GBP has been trending lower since the low UK CPI print on 13 October, and today, the cross took yet another dip on stronger-than-expected UK retail sales figures of +1.7% m/m (ex fuel) in September.
We expect the ECB to keep its powder dry at the meeting later today, and while Draghi is likely to retain a dovish tone and repeat that it can adjust the size, duration and composition of the QE programme, we suspect that he might disappoint slightly in relation to rate cut speculation (note: the market is pricing in nearly 50% probability of a deposit rate cut in 2016). See ECB preview: More wait-and-see..., 19 October, for details.
In all, we see risks tilted slightly to the upside for the euro in connection with the ECB meeting later today and we therefore recommend taking profit on short EUR/GBP positions for tactical reasons. We thus close our short EUR/GBP position at 0.7300 and book a profit of 2.14%.
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