A spate of jihadist terror attacks in Germany and Turkey have led to a slight recovery in GBP/EUR.
The Euro weakened marginally following the attacks as they raise the possibility of increasing support for far-right, nationalist, anti-EU, political parties who could gain power in one of 2017's many elections and begin a breakup of the EU.
The Pound, meanwhile, could benefit from the outlook as it will not be so alone if other countries in the EU also wish to tighten up their borders and challenge the EU's cherished principle of freedom of movement.
From a technical perspective, the short-term trend remains bullish although the strong resistance levels located just above the exchange rate are likely to impede progress higher.
We are less bearish than previously - more neutral now - with confirmation of a continuation of the bull trend coming from a move above 1.2200, to a target at 1.2300.
For confirmation of a bearish reversal, we would need to see a break below the trendline from the October flash crash lows.
Such a break would be confirmed by a break below 1.1650, with a target at 1.1425.
Until such a breakdown is confirmed, however, the uptrend remains technically intact.
Terrorist Attacks Revive Fears of Far-Right Ascendancy in Europe
The two gruesome terrorist attacks in Berlin and Istanbul on Monday have raised the spectre of a far-right populist movement gaining ascendancy in Europe and undermining the integrity of the EU and its institutions.
Both the driving of the juggernaut into a Christmas market in Berlin and the shooting of the Russian Ambassador at an art exhibition in Istanbul have been attributed to extremist Islamic terrorist groups.
The Christmas market attack, in particular, could deepen concerns already raised about Angela Merkel's decision to allow a million middle eastern refugees into Germany at the height of the Syrian conflict.
The driver of the lorry which caused the Berlin attack has been confirmed as a Pakistani immigrant and there have already been criticisms from far right activists to close down Germany's borders.
The upshot of the incidents could be that the Euro starts to weaken, especially if far right groups make noticeable gains in polls. German elections in the summer were
Germany has a general election in the summer when the far right could have an opportunity to grab power, and whilst previously there seemed little real chance of this happening the probabilities may have increased since an escalation in recent terrorist attacks.
The increase in terrorist activity and heightened chance of the breakup - or more likely reform of the EU, including its open border policy - may help the Pound as the UK may not be the only country negotiating for some control over the hallowed principle of freedom of movement.
Positive Eurozone Inflation Data Supports the Euro
From a data perspective the Eurozone showed steady if unspectacular inflationary growth of 0.6% in November whilst Core Inflation (not including food and fuel) remained stuck at 0.8%.
Nevertheless, the headline figure was the highest recorded since April 2014, signs of a breakthrough for a region which has been stuck with stubborn stagflation for years.
It was noted that the increase in headline inflation was “driven by higher cost of restaurants and cafés and rents and tobacco,” according to data website Tradingeconomics, whilst fuel, including oil and gas fell by -0.11% and -0.04% respectively in price.
This suggests recent OPEC-inspired price gains for crude oil have not yet passed through to the real economy, but that when they do Eurozone inflation is likely to rise more rapidly, which could be positive for the Euro.
ECB Tapering Supports Euro
Supporting the outlook for the Euro is the European Central Bank (ECB) which announced that it will be lowering its monthly QE purchases, from €80bn to €60bn.
New research suggests the call has seen investors have move out of high grade assets, also known as “eligible debt”.
This has caused an increase in supply of the high grade, "eligible", Eurozone government debt which has led to a fall in price.
For bonds, a fall in price leads to a rise in yield, and higher government bond yields normally increase the value of a currency.
This suggests ECB ‘tapering’ could be supporting the Euro more than analysts had expected.
“Over the past week, investors have moved out of eligible assets, embracing non-eligible ones. High grade credit and government bond funds have been hit by outflows. Contrariwise, equity and High Yield funds have recorded inflows,” said BOFAML in a briefing to clients.
The chart below shows how the ECB’s decision to ‘taper’ asset purchases of ‘eligible’ debt may have begun a change in trend for demand for the two sets of assets.
This change in trend, if it holds, may signal a rise in Eurozone sovereign bond yields which would be supportive for the Euro.
Flows, meanwhile, have increased to higher-yielding assets such as stocks, which recorded inflows that were the “highest in 40 weeks,” said BOFAML.