EUR/GBP Analysis:
- Expansionary conditions remain despite drop in EU PMI data
- The seemingly ever-bearish ECB ready to support the economic zone despite winding down one of its stimulatory tools (PEPP)
- EUR/GBP key technical levels considered
Euro Zone PMI Data Miss – Omicron Dampens Activity in December
The Euro continues its downward spiral against other major currencies as the European Central Bank (ECB) maintains a cautious and flexible approach to monetary policy, in stark contrast to the US and UK as they look to hike rates this year.
PMI data for the Eurozone dipped in December as the Omicron variant spread throughout Europe. Restrictions to contain the virus negatively impacted activity in Germany’s services sector. The PMI reading of 53.3 was less than the flash estimate of 53.4 and remains above the 50 mark – the level used to distinguish between expansionary or contractionary economic conditions.
Diverging Monetary Policy Continues to Weigh on the Euro
The Euro looks vulnerable against its more hawkish peers in the UK and US as ECB President Lagarde continues to stress the need to “maintain flexibility and optionality” in response to the threat of new coronavirus variants.
While the ECB has identified an end date to its Pandemic Emergency Purchase Programme (PEPP), it insists that the proceeds from these bonds will be invested to support the economy. In a further attempt to ease the transition, the longer running, Asset Purchase Programme (APP) will see bond purchases of 40 billion euros a month until 2H 2022 and 20 million thereafter with no specified end date.
In contrast, the Bank of England announced its first rate hike in December of last year with the US expected to follow suit in 2022 once bond and asset purchases have been wound down. Higher expected interest rates generally buoys a currency and the charts have shown exactly that as EUR/USD and EUR/GBP continue their long term downtrends.
EUR/GBP Drops towards 2021 Low – Key Technical Levels Analyzed
The weekly chart does a great job at framing price action throughout 2021 with a distinct downtrend that has lessened in intensity but not direction. The pair continues to print lower highs and lower lows, albeit in a rather choppy fashion (descending channel). A break below the lower bound of the descending channel brings the 2020 low of 0.8275 into immediate focus. However, a bounce off this support level could see a short term move higher with resistance at 0.8390 and 0.8485 which may re-ignite a bearish continuation from the more attractive levels.
EUR/GBP Weekly Chart
Chart prepared by Richard Snow, IG
The daily chart helps isolate a key decision point for the pair right now as the descending trendline comes under pressure once more. A break below would shift the focus to the 2020 low around 0.8275.
EUR/GBP Daily Chart
Chart prepared by Richard Snow, IG
— Written by Richard Snow for DailyFX.com
Contact and follow Richard on Twitter: @RichardSnowFX
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