Short EUR/GBP: Euro Fundamentals Deteriorate Ahead of Central Bank Decisions
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EUR/GBP Bearish Continuation
- Euro zone fundamentals weaken: Technical recession confirmed, inflation data improving which helps build a case for a more dovish ECB to come
- Markets anticipate another 100-bps worth of tightening from the BoE this year as inflation is way too high still at 8.7%
EU Fundamentals are Likely to Embolden ECB Doves
Downward revisions to both the Q4 2022 and Q1 GDP quarterly growth figures suggests the European economy is taking strain as financial conditions are set to tighten even further next week. With the euro zone in a technical recession and seeing core inflation head lower, bears within the ECB’s ranks may soon garner support from more hawkish governing council members when it relates to the path of future monetary policy. Furthermore, disappointing Chinese data has revealed that the reopening of its economy has not gone to plan – which has negative trade implications for Germany, Europe’s biggest economy.
On the other hand, the bank of England still sees inflation at 8.7% which is way too high but the good news is that they forecast the figure to drop quickly for the rest of 2023. Nevertheless. markets still anticipate as much as 100-basis points into year end which would place the bank rate at levels anticipated for the Fed at 5.5%. Such expectations are likely to support the pound in the interim.
Market Implied Probabilities of Future BoE Rate Hikes
Source: Refinitiv, prepared by Richard Snow
EUR/GBP appears to be consolidating within a pennant formation which usually hints at a bearish continuation provided it is preceded by a downtrend. The death cross (blue line crossing below the red line) suggests a bias towards bearish moves. Should prices break below the pennant or even consolidate before regaining downside momentum, 0.8565 is the immediate level to watch, followed by 0.8515 and 0.8500 flat. The bearish bias would need to be reevaluated should prices breach 0.8650 and continue to produce a daily candle close above the zone around 0.8725 (orange zone). An additional risk to this setup is the nearness of the RSI to oversold territory. Therefore, a period of consolidation may be welcomed in this case.
EUR/GBP Daily Chart
Source: TradingView, prepared by Richard Snow
--- Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.