If market action is what you seek, then keep a close eye on the EURGBP this week.
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The currency pair seems to be gearing up for a major move as investors brace for a series of key economies reports and central bank meetings over the next few days. Expectations remain elevated over the policy divergence between the Bank of England (BoE) and European Central Bank (ECB) dragging the EURGBP lower this quarter. However, it may not be an easy meal for bears given the critical support at 0.8300 which has stood the test of time since 2016. While a breakdown could open the flood gates that sweep bulls away, such a move may require a potent fundamental spark.
Before we discuss what to expect from the BoE and ECB on Thursday, it is worth keeping in mind that the pound has appreciated against most G10 currencies year-to-date.
When looking at the euro’s performance against the pound, it is a similar story with the EURGBP dropping over 0.7% since the start of 2022. Briefly looking at the technical picture, it’s all about the support 0.8300. While the technicals are pointing to further downside, bears may be waiting for the fundamentals to kick in.
There is a similar picture on the weekly charts, with 0.8300 acting as the final gatekeeper for bears.
What to expect from the BoE…
The BoE is widely expected to raise interest rates by 25 basis points when it meets to decide policy this week.
Given how inflation in the United Kingdom has reached levels not seen in 30 years, the BoE has also waged a war against rising prices with its weapon of choice tighter monetary policy. The burning question on the mind of many investors is how far, fast and aggressive will the central bank be? Money markets are predicting that the U.K. will see five quarter-point rate increases in 2022. Should the BoE strike a hawkish tone and reinforce expectations over consistent rate hikes this year, pound bulls are likely to be injected with renewed inspiration.
One thing to keep in mind is the fact that the central bank is raising rates at a fragile time. The political drama in Westminister concerning Prime Minister Boris Johnson may foster a sense of uncertainty. On top of this, the lingering after-effects of Brexit could impact the economic recovery, sapping some confidence from BoE hawks. If these concerns are raised during the policy meeting, this could dampen rate hike bets, ultimately – weakening the pound.
Same old story for the ECB?
Record high euro area inflation levels are likely to dominate the discussions during the European Central Bank meeting on Thursday.
However, this is unlikely to spark any immediate policy action from the ECB with interest rates expected to remain unchanged. Nevertheless, investors are likely to pay very close attention to any potential shifts in its language – especially after Euro inflation hit 5% in December, the highest on record. In regards to GDP, economic growth slowed sharply in the final quarter of 2021 thanks to the Omicron menace, supply shortages, and rising energy prices. Growth grew 0.3%, a marked slowdown from the 2.3% growth witnessed in Q3. It will be interesting to hear the ECB’s thoughts about this and outlook for 2022. Should the central bank maintain a highly accommodative stance with doves spreading their wings, this is likely to pressure the euro further.
EURGBP poised to break below 0.8300?
The policy divergence between the Bank of England and the European Central Bank remains an ongoing theme that continues to pressure the EURGBP.
Taking a look at the technical picture, the EURGBP remains in a wide on the daily timeframe with solid support at 0.8300 and resistance around 0.8380. Prices are trading below the 50, 100, and 200 Simple Moving Average while the MACD trades below zero. Sustained weakness below 0.8380 could trigger a decline back towards the mighty 0.8300 support level. If bears are able to breach this point, the next key level of interest can be found at 0.8000. Alternatively, a breakout above 0.8380 could spark a move towards 0.8420.
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