Archived IMT (2011.02.03)

THE RENEWED DECLINE IN EURGBP highlights the bearish multi-month outlook for the cross first communicated on Nov 14 Article. The weakness reflects increasingly inflationary UK data and the hawkish shift in the 9-member MPC Committee of the Bank of England. Intermittent EURGBP bounces have primarily resulted from positive euro news flow (decent bond auctions, hawkish ECB talk and receding peripheral bond spreads).

Here is the LATEST EURGBP CHART w/ GER-UK 2-year yield spreads http://chart.ly/6a9ptdf The story from the 2-year yield differentials also illustrates the GBP-positive outlook against euro. German 2-year govt yields minus their UK counterpart have fallen back below zero at -0.07%. The daily correlation between the GE-UK 2-year spread and EURGBP stands at 0.61. Considering markets pricing for at least one BoE rate hike before year-end, the fundamental dynamics appear to be in synch with the technical picture. Lower highs in EURGBP as well as December and January rebounds, which failed to regain the November highs should likely keep the bulls out of the fray. Expect a prelim target of 0.8350, followed by 0.8150 (Aug 2010).

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