Short EUR/GBP – Low Risk, Low Reward
- The Bank of England is looking to hike rates soon.
- ECB will continue to buy bonds when PEPP finishes.
- Rate differential will continue to favor Sterling.
Traders who favor range trading will have had EUR/GBP on their watch list for months with the pair oscillating in a two big figure range since early May. Moves both ways have been slow with only the odd burst of volatility disrupting the market. Looking ahead to the last three months of the year, the lower bounds of the current 0.8450 – 0.8670 range may well come under pressure as the UK looks set to begin tightening its monetary policy, albeit modestly, ahead of the EU. The latest Bank of England decision – all policy levers untouched – saw a second MPC member vote for ending the central bank’s bond-buying program early, while inflation in Q4 is projected to rise to 4% before drifting lower. The MPC did acknowledge that global inflationary pressures have remained strong, including in the UK, and that there ‘ are some signs that cost pressures may prove more persistent’. Add into the mix the sharp increase in energy prices and inflation is likely to remain above target for many quarters.
In contrast, some ECB members have been mooting increasing or extending, the central bank’s bond-buying program (APP) when the pandemic measures (PEPP) are completed in March 2022. While the ECB are also facing rising price pressures, they are highly unlikely to raise interest rates in 2022, in contrast to the UK with the money markets now expecting at least one 15 basis point rate hike next year with the possibility of up to 40bps by the end of the year. This rate differential will weigh on EUR/GBP and cap any upside momentum.
The daily chart shows the break lower starting to happen as the longer-dated 200-day simple moving average comes into play for the first time in months, capping any rally and adding further downside pressure on the pair. A confirmed break below all three simple moving averages will leave support under pressure in the weeks ahead.
EUR/GBP Daily Price Chart
