3 Reasons Why the Pound Could Start Losing Versus the Euro

With all the talk of a possible “Grexit,” it’s easy to overlook the problems of other economies in Europe such as the U.K. In an article I have written a few weeks ago, I talked about how the pound was starting to be considered as a “safe haven” in Europe. However, it seems that recent events and data are beginning to make investors think differently.

Dovish BOE

One of the main reasons for this is that yesterday’s BOE meeting minutes showed that the central bank could still engage in additional asset purchases. Even though it was only David Miles that opted for an increase in the central bank’s 325 billion GBP quantitative easing program, the other voting members came extremely close to siding with him.

In fact, Deputy BOE Governor Charlie Bean even indicated that they may seriously need to consider restarting their bond purchases if economic conditions worsen.

Weak economic data

Another thorn on the pound’s side is its weak economic standing. Last week, BOE Governor Mervyn King announced a cut in the country’s growth forecast for the next two years. He said that growth will only be 0.8% this year instead of 1.2%. For 2013, growth will probably be only at 2% and not 3%.

And just yesterday, the retail sales report for the month of April disappointed greatly. The Office of National Statistics reported that volumes fell 2.3%, dropping more than twice as expected and marking its largest drop in 27 months.

Negative external pressures

There are also a few external factors that could soon weigh on the pound.

For instance, the International Monetary Fund (IMF) has stuck its nose on the BOE’s business saying that the central bank should increase its bond-buying program in order to boost the economy. Heck it even said that the MPC chaps should start to consider cutting the official cash rate which has been at its record low of 0.5% since March 2009.

Of course, there’s also the threat of a euro zone break up. Around half of the U.K.’s trade goes to the region, which makes it pretty vulnerable to euro zone’s debt troubles.

Looking at the weekly chart of EUR/GBP, we see that the pound was able to consistently stack up its gains against the euro. However, last week’s candle closed as a hammer at the .8000 major psychological handle. According to the School of Pipsology, the candlestick pattern is usually taken as a bullish signal.

Hmmm, do you think that this, along with the reasons I enumerated above, could be a sign that the pound is about to get sold-off?

  • Danielker88

    I am quite a newbie but however I would like to point out since you mention thatĀ 
    Around half of the U.K.’s trade goes to the Euro region. If euro is doing bad it might affect the UK? so it is sort of positiveĀ correlated? So I think staying off the pair will be better. Trading in EUR/USD would be a better choice because it seems like the US is slightly bullish and the Eur is alot more bearish.

  • AKtrader1

    Short term, I always figured the Olympics were going to be a bullish shot to the GBP, y/n?