Short EUR/GBP: Exuberant Euro Could be Unsustainable Against Hawkish Bank of England

EUR/GBP FUNDAMENTAL BACKDROP

With the Bank of England’s (BOE) recent hawkish pivot occurring prior to the news around a potential ceasefire in Ukraine, sterling did not see the significant upside relative to the Euro. The Euro zone is impacted more so than the UK which is driving the extreme volatility within the Euro as opposed to the pound.

Central bank divergence is growing between the BOE and European Central Bank (ECB) while the EUR/GBP cross has reached levels last seen in late 2021. I do not believe this upside is sustainable against the current economic backdrop and may pull back towards more realistic levels.

TECHNICAL ANALYSIS

EUR/GBP DAILY CHART

Chart prepared by Warren Venketas, IG

Price action on the daily EUR/GBP chart above shows the medium-term downward sloping trendline (black) come into consideration as key resistance. While there is still room for further upside towards the 0.8500 psychological level and 0.8530 38.2% Fibonacci, I think this short-term rally will be short-lived. Should de-escalation come to realization in Ukraine, the Euro zone will still be left worse off in addition to the more aggressive BOE.

The Relative Strength Index (RSI) confirms this key area of confluence with the 65 level (black) holding as resistance since august 2021. From a bullish perspective, a confirmation daily candle close above 0.8530 could reject the short outlook.

Resistance levels:

• 0.8530
• 0.8500

Support levels:

• 0.8400

Contact and follow Warren on Twitter: @WVenketas