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Euro Forecast: EUR/GBP Bounce Still in Focus in the Aftermath of the ECB and BoE

Euro Forecast: EUR/GBP Bounce Still in Focus in the Aftermath of the ECB and BoE

Daniel Dubrovsky, Strategist

Euro, British Pound, EUR/GBP, ECB, BoE, Inflation, Technical Analysis – Analyst Pick

  • Euro rose against the British Pound last week, is momentum stalling?
  • There is more room to build up ECB hawkish bets compared to BoE
  • EUR/GBP 4-hour chart trendline breakout and Golden Cross eyed

Fundamental Analysis

The Euro could be readying to extend recent gains against the British Pound. Last week, a notable hawkish pivot from the European Central Bank offered the single currency some strength. This included against the British Pound. That is not to say that the latter did not find some support either. For Sterling, the Bank of England delivered a 25-basis point rate hike.

The BOE’s move was expected, but the ECB’s change in rhetoric was not. Arguably, the ECB is one of the more dovish central banks compared to its G-10 peers. But even it has been starting to acknowledge the rising inflationary pressures that the Euro area is facing. In January, headline CPI clocked in at 5.1% y/y versus 4.4% anticipated. The core gauge printed at 2.3% y/y against 1.9% estimates.

Recently, ECB Chief Christine Lagarde noted that the risks to the inflation outlook are ‘tilted to the upside’. She did mention though that the central bank’s March projections will offer a better judgement, however. ECB policymaker Francois Villeroy said that the market reaction last week might have been ‘too strong’. Priced-in expectations see at least 40 basis points of tightening through the end of this year.

The BoE has had a head start to its tightening cycle, with the benchmark lending rate sitting at 0.5% after last week’s hike. Overnight index swaps are pricing in five more to come by December. With markets already angling for an aggressive BoE, more room could be left for traders to bid up hawkish ECB bets, if inflation continue rising. That could offer further upside potential for EUR/GBP.

EUR/GBP Versus German-UK 10-Year Government Bond Yield Spreads

Euro Forecast: EUR/GBP Bounce Still in Focus in the Aftermath of the ECB and BoE

Chart Created in TradingView

EUR/GBP Technical Analysis 4-Hour Chart

On the 4-hour chart, EUR/GBP bounced off the 0.8276 – 0.8294 support zone last week. This range is made up of lows from 2020. In fact, the pair was struggling to pierce this zone as positive RSI divergence formed. The latter is a sign of fading downside momentum.

The pair also confirmed a breakout above a near-term falling trendline from December. However, prices struggled to pierce the 61.8% Fibonacci retracement at 0.8479, making for key resistance. Still, a bullish Golden Cross between the 50- and 200-period Simple Moving Averages are now in play.

The latter could offer key support in the event EUR/GBP succumbs to near-term selling pressure. Clearing the 61.8% retracement exposes the 0.8553 – 0.8538 inflection zone before setting course to target the December peak at 0.8599. Clearing 2020 lows likely opens the door to downtrend resumption.

Euro Forecast: EUR/GBP Bounce Still in Focus in the Aftermath of the ECB and BoE

Chart Created in TradingView

--- Written by Daniel Dubrovsky, Strategist for DailyFX.com

To contact Daniel, use the comments section below or @ddubrovskyFX on Twitter

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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