Forex Market: EUR/GBP rises a second day as ECB is expected to bolster bond-purchasing program

EUR/GBP rose for a second straight day and traded in proximity to intraday highs in early European session on Thursday, as market players largely expected the European Central Bank to expand its Pandemic Emergency Purchase Programme at its policy meeting today to prop up coronavirus-ravaged economy.

“I suspect the market has already priced in an increase of about 500 billion in the PEPP and in the near term, there is risk of a correction,” Masafumi Yamamoto, chief currency strategist at Mizuho Securities, said.

“The market could react positively if the ECB expands the target of its bond purchase or scraps its limit on each country. But in terms of the total size, it is hard to expect a positive surprise now,” Yamamoto said.

As of 6:50 GMT on Thursday EUR/GBP was edging up 0.12% to trade at 0.8944, after touching an intraday high of 0.8954 during early Asian session, or a level not seen since June 1st (0.9007).

Against the US Dollar, the common currency was trading slightly lower on Thursday, following a seven-day streak of gains that pushed the EUR/USD pair up to a 12-week high of 1.1258 on Wednesday.

Against the Japanese Yen, the Euro was trading steadily on Thursday, after the EUR/JPY pair climbed to 122.626 yesterday, or a level not seen since January 17th.

In terms of macroeconomic calendar, at 8:30 GMT today IHS Markit/CIPS will report on UK construction sector activity for May. The respective Purchasing Managers’ Index probably came in at a reading of 29.7, according to market expectations, up from 8.2 in April. The latter pointed to the sharpest rate of contraction in the sector since comparable series began in April 1997, as house building, commercial activity and civil engineering works shrank at record rates.

At 9:00 GMT Eurostat will release the monthly report on retail sales in the Euro area for April. Analysts expect a 15.0% drop compared to a month ago. In March, retail sales plunged at a monthly rate of 11.2%, or the steepest since comparable series began in 1995, as restrictive measures led to business closures and forced consumers to remain at home. Sales of automotive fuel went down 20.8% in March, while sales of non-food products dropped 23.1%.

At 11:45 GMT the European Central Bank is scheduled to announce its decision on policy. The bank is largely expected to keep its benchmark interest rate at the record low level of 0% and the deposit facility rate at the record low level of 0.50%. At its policy meeting concluded on April 30th the ECB reduced the rate on its TLTRO III program and offered a new series of non-targeted pandemic emergency longer-term refinancing operations (PELTROs) to ensure additional liquidity to the financial system. The minutes from that meeting later revealed the central bank was fully prepared to adjust all of its measures in support of the Eurozone economy, which could include increasing the size of the Pandemic Emergency Purchase Programme (PEPP) and adjusting its composition.

The policy decision will be followed by a press conference with ECB President Christine Lagarde at 12:30 GMT.

Bond Yield Spread

The spread between 2-year UK and 2-year German bond yields, which reflects the flow of funds in a short term, equaled 64.3 basis points (0.643%) as of 6:15 GMT on Thursday. It has been the highest spread since June 2nd (64.9 basis points).

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 0.8917
R1 – 0.8955
R2 – 0.8977
R3 – 0.9015
R4 – 0.9053

S1 – 0.8895
S2 – 0.8857
S3 – 0.8835
S4 – 0.8814