EURGBP has been under pressure in recent weeks, as markets have priced in a higher probability of rate cuts by the European Central Bank (ECB) compared to the Bank of England (BoE). This divergence in monetary policy expectations has weighed on the euro, pushing it to its lowest levels against the pound in nearly three months.
The ECB’s dovish stance has been driven by concerns about a slowing economy and rising inflation. The eurozone economy is expected to grow by just 0.2% in 2023, while inflation is forecast to remain above the ECB’s target of 2% for the foreseeable future.
In contrast, the BoE is expected to continue raising interest rates in an effort to combat inflation. The UK economy is expected to grow by 1.5% in 2023, and inflation is forecast to peak at around 10% in December.
The divergence in monetary policy expectations is likely to continue to weigh on EURGBP in the near term. However, the pair could be supported by a number of factors, including:
Technical Analysis
EURGBP is currently trading at 0.85810, with the price action slightly flat following a failed break below the descending channel trading pattern. Price action trading well below key SMAs [20-SMA (green line), 50-SMA (blue line), and 100-SMA (orange line)], suggesting the presence of bearish pressure in the market. However, caution is warranted with the RSI currently at 33.58, which is in oversold territory. This suggests that a bounce could be due.
Short-term trading opportunities could exist towards the support level at the 0.85540 price level should the bears sustain a push lower. A break below the initial support could confirm the bearish momentum, likely bringing the 0.85298 support level into play.
However, short-term trading opportunities could arise towards the initial resistance at 0.86061 should the bulls sustain a push higher. A break above the 0.86061 price level would likely bring the 0.86350 and 0.86561 resistance levels into play in the short term.
Summary
EURGBP is likely to remain under pressure in the near term as the divergence in monetary policy expectations between the ECB and the BoE continues to weigh on the euro.
Technically, EURGBP is trading below key SMAs, and the RSI is flat, suggesting that the bears are in control of the market. However, a pullback could be due, and short-term trading opportunities could exist towards the support and resistance levels mentioned above.
Sources: TradingView, Trading Economics, European Central Bank, Market Screener, Reuters, Dow Jones Newswire, MT Newswire.
Piece written by Mfanafuthi Mhlongo, Trive Financial Market Analyst
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