British Pound (GBP) Forecast: GBP/USD Dragged Down by Euro Woes

[MongiIG]

Jul 11, 2022 | DailyFX
Justin McQueen, Strategist

GBP/USD, EUR/GBP ANALYSIS AND TALKING POINTS

• Tory MPs Enter the Leadership Race
• GBP Falls Back Below 1.2000

 

GBP: While politics grabs the headlines as Tory MPs throw their hat into the Tory leadership contest, the Pound will remain dictated by external events. As such, with a renewed bid in the greenback, GBP is once again on the backfoot as cable breaks back below the 1.20 handle, falling in sympathy with the Euro.

Today sees gas flows from Russia to Germany via the Nord Stream pipeline stopping completely for a planned 10-day annual maintenance. However, in light of the current backdrop and with gas flows already falling to 40% capacity, the risk is whether Russia switches back the tap on after the maintenance period. In turn, headline risk regarding Russian gas flows will pick up during this period.

If Russia were not to switch on the Nord Stream pipeline, markets will significantly reprice a recession in the Euro Area, pushing the Euro firmly through parity, dragging the Pound with it, opening the doors to 1.17 and perhaps even an extended move to 1.15.

Looking ahead, today is a relatively quiet start to the week in terms of scheduled economic data releases. However, BoE Governor Bailey will be speaking on the Financial Stability Report later today.

On the technical side, downside momentum will likely remain for cable with any rallies likely to be faded. Meanwhile, declines in EUR/GBP have been halted at the 100 and 200DMA, although, with the Euro extremely fragile, upside is limited.

GBP/USD CHART: DAILY TIME FRAME

Source: Refinitiv

EUR/GBP CHART: DAILY TIME FRAME

Source: Refinitiv