As can be seen in the chart above, EURGBP has been correcting off the recent .9413 high, as it has appeared that all is not well in the Eurozone. In particular yesterday saw claptrap about Angela Merkel resigning! This was just stop hunting. I have a good idea where this rumour was probably generated. The good part is that it has taken EURGBP back into a great risk reward zone. While above .8705 this pair remains bullish from a structural standpoint.
From a fundamental approach we are all familiar with the trouble in Greece and with Greek government debt. To put it into perspective consider that Greece is responsible for 3% of Eurozone GDP. Spain and Ireland are old news too, with Ireland looking like it is willing to take the appropriate steps to improve its fiscal position. Now contrast this with the article from the FT via Naked Capitalism.
The probability of a sterling crisis, in my opinion, is much higher then is priced into the currency markets. Over the last 18 months private debt has been passed over to the public sector as governments in most industrialised nations (and the UK in particular) have bailed out their bankng sectors and supported other sectors. This is why there is so much emphasis on sovereign default probabilities. What has taken place is that the debt has just moved around from private to public bodies, but it has not really gone down. Deleveraging is alive and well. Don't forget the UK is loaded to the brim with civil servants. The state is one of the largest, if not, the largest employer. So now it is time for austerity when half the nation gets its pay check from the state! To my mind EURGBP back at .9805 or parity makes a lot more sense then back in the old range near .6500.
I would recommend getting long on the approach to .8787 with a stop under .8705. Great risk reward.
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