EURGBP slides as ECB turns to risky manoeuvres as ratings downgrades beckons


The EURGBP pair dropped in overnight trading as the market reacts to the new manoeuvres by the European Central Bank (ECB).

ECB shields weak Europe companies

The current coronavirus pandemic has caused shocks in Europe and around the world. As governments implement shutdowns, many companies are not making any money. As this happens, these companies have obligations to their lenders. As a result, a wave of new ratings downgrades in Europe is coming. These downgrades will add to the $275 billion non-financial corporate bonds that have been downgraded to triple-B.

In a statement yesterday, the European Central Bank announced that it was changing its rules to accept these bonds. It did this by grandfathering the eligibility of marketable assets that used as collateral in the Eurosystem credit operations. This means that the ECB will accept some junk-rated bonds as collateral for the bonds it offers.

EURGBP slides ahead of EU leaders meeting

The decision by the ECB came ahead of a meeting where European leaders will deliberate on a new funding mechanism. According to Bloomberg, the European Commission is eyeing a $2.2 trillion package to help countries deal with the virus. This is as the commission expects the bloc’s output to drop by 10% this year.

Still, any funding deal will meet divisions about how to fund it. Northern governments like Netherlands have differed with their southern counterparts about how to deal with the crisis. In a report by Bloomberg, 300 billion euros of the funds will be got from the 2021 to 2027 budget while an additional 320 billion euros will be borrowed. Other details of the financing were vague.

In an interview with the Financial Times, Emmanuel Macron asked the EU members to share the burden. His country, together with Spain and Italy have called for joint debt sales. This idea ha been rejected by Germany and Netherlands.

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EURGBP technical forecast

The EURGBP pair declined to an intraday low of 0.8750 in reaction to the new action by the ECB. On the four-hour chart, the pair has found significant support around the 38.2% Fibonacci Retracement level. This retracement connected the lowest point in February with the highest point in March.

I expect the overall bearish trend to continue if the pair moves below the 0.8750 level. If this happens, the first stop will probably be at the important support of 0.8680, where it formed a double bottom pattern.

The alternate scenario is where the pair resumes the upward trend and attempts to retest the 50% retracement at 0.8888.

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