Political uncertainty in Spain and the lack of progress in Brexit negotiations determine the dynamics of the euro/pound cross-currency pair. At this point, we have to determine the "weakest link" among these currencies, assessing the magnitude of the impending problems. Both Britain and Spain are on the threshold of important events, the outcome of which depends not only on the foreign policy background, but also on the economic attractiveness of these countries.
In fact, the cross-currency pair is clamped in the grip of political ultimatums, the vague prospects for relations between Brussels and London, as well as the uncertain ECB policy. But, despite the turbulent whirlpool of events, the European currency still keeps "afloat", which can not be said about the pound, which finally lost ground underfoot.
Let's start with Spain. Today at 10 o'clock in the morning was the deadline for the next (second on the record) ultimatum, which was announced by Madrid to Catalonia. The Spanish authorities want from Carles Puigdemont, the head of the region, a decisive answer: whether he declared independence of the nationality or not. The elaborate response to the first ultimatum was not given to Madrid, after which Mariano Rajoy threatened the Catalans with direct control, if during the second time around a clear answer was not given.
Just minutes before the expiration of the second ultimatum, Puigdemont said that the deputies of the Catalan parliament could vote for independence if they did not engage in constructive dialogue with Barcelona. Generally, the leader of the Catalans again avoided a specific answer, so the "ball" is now on the side of the government of Madrid. Most likely, the Spaniards will still trigger the mechanism of the Article 155 of the Constitution, which allows direct oversight of Catalonia. It should be noted that for the entire period of the existence of the Basic Law of Spain, this norm has never been applied, so the further mechanism for its implementation is not entirely clear.
The fact is that the experts of law point to the legal nuances: on one hand, the Spanish Constitution rejects the possibility of secession of its regions. But, on the other hand, Catalonia did not officially announce such a step (which is why Madrid needed a clear response to the ultimatum), so from the legal point of view, the Spanish response will not look appropriate.
The situation is complicated by the fact that Puigdemont signed the Declaration of Independence yesterday, but immediately suspended it in the hope of a further dialogue with Rajoy. Now, the Spanish politicians have to decide whether there are enough grounds for the enactment of Article 155 of the Constitution (with unpredictable consequences) or Madrid will continue to get stuck in negotiations with Barcelona. If Madrid refuses to engage in dialogue, the Constitution allows the authorities to take direct control of financial institutions, law enforcement agencies and other instruments of state influence. It should be noted that these measures should be approved by the Senate of the country.
Naturally, before the solution of the Catalan problem, the European currency will be under certain pressure. According to many political experts, the Spanish authorities will try to avoid the aggressive scenario of events as much as possible. Most likely, the situation will again continue to be intense, and the negotiation process will continue in one form or another.
That is why the euro today almost ignored the Spanish events - for the euro it is more a deterrent to its growth than a downgrade factor. Coupled with the dollar and other cross-currency pairs, the euro feels fairly confident, and paired with the pound even shows a character: this week the EURGBP grew by more than 100 points.
This is understandable. Despite the personal involvement of British Prime Minister Theresa May in the negotiations with Brussels, their results are likely to be disappointing. The incoming signals indicate that a compromise on the key issues of Brexit will not be achieved again and the negotiations will be postponed to the next EU summit, which will be held on December 14-15. The EU refuses to discuss with Britain future economic and trade relations until the rights of EU citizens in this country are settled and the status of the border of Northern Ireland is stipulated. In turn, the UK does not show the appropriate political flexibility, following the position of the Conservative Party. The situation has again reached a deadlock, and this fact is stated today or tomorrow at the summit.
Thus, weak British macroeconomic statistics and a likely failure in negotiations with Brussels will exert strong pressure on the pound. The European currency against this background looks stronger, while the Spanish developments did not go beyond the negotiation process. In addition, the market still harbors hopes for the exit of the European QE, which also supports the euro.
From the technical point of view, the pair also has the potential for growth. Consider the timing of EURGBP on the timeframe D1. First, the price is located between the middle and top lines of the Bollinger Bands indicator. Secondly, the indicator Ichimoku Kinko Hyo formed a bullish signal "Golden Cross", while the pair itself is above the lines of Tenkan-sen and Kijun-sen.
The combination of these factors suggests that the pair can "surge" up, reaching the first resistance level - 0.9025 (this is the lower boundary of the cloud Kumo). The resistance level is the middle line of the Bollinger Bands indicator and the price is 0.8880.
