EUR/GBP Hovers Above 0.85 as Buyers Look for Support

Key Talking Points:

• EUR/GBP finds renewed support at 0.85
• GBP to remain sensitive to domestic data on the back of policy tightening expectations

EUR/GBP is edging higher this morning after finding renewed support at 0.85. Wednesday’s candlestick offers the potential for a bullish reversal after a week of declines following the bullish breakout last week. The moves have been fully reversed and the pair is at risk of falling back within a tight range before the next move happens. The test will be whether EUR/GBP can claim a daily close above 0.8525, Wednesday’s high, and a key area of confluence in recent weeks. If so, momentum could pick up towards 0.8550 over the coming days, whilst a pullback before today’s close is a pretty bearish signal going forward.

EUR/GBP Daily chart

GBP has been bouncing higher after a strong pullback last week as money markets are excessively pricing in a hawkish BOE by year end. The drop in the currency meant that adding GBP shorts was less attractive and so the bounce higher was expected. But the outlook for the British currency remains pretty weak as positioning continues to be playing to GBP’s detriment, which is likely going to be more sensitive to domestic data going forward, meaning it will have a greater impact on EUR/GBP given market expectations about monetary policy.

On the Euro side, the ECB has begun to explore a new bond-buying program when the pandemic program ends in March as to keep in line with its ultra-flexible financing conditions. The impact on EUR is very limited as this move is highly expected, with volatility more likely if the ECB surprises on the hawkish side. But the Euro is likely to remain sensitive to the surge in energy prices, more so that the Pound, which could keep gains capped for EUR/GBP in the short term.

The outlook for the pair is dependent on how the factors mentioned above play out. Some good data out of the UK and an increased likelihood of the BOE raising rates by Feb 2021 would be supportive for the Pound and could see EUR/GBP move towards yearly lows at 0.8450, whilst a stronger euro, or a weaker Pound as hawkish bets fold, could see EUR/GBP jumping towards 0.87.

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— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin