EUR/GBP at 18-month lows

The EUR/GBP (CME:RPM14) is on the back foot again today as traders price in a growing divergence in monetary policy expectations for the two European currencies. This dynamic is reflected in the spread between British and German 10yr yields, which has stretched out to its widest level since 1997 this week.

Tackling today’s economic data first, the euro extended this week’s drop on the back of deflationary second-tier data, including a disappointing -0.1% print in German wholesale prices and a 0.0% reading in French CPI. As long as the region continues to struggle with deflationary pressures, calls for outright Quantitative Easing will grow louder. Meanwhile, in the U.K., the market is looking ahead to BOE Governor Mark Carney’s Mansion House speeches to see whether he subtly softens his tone toward raising interest rates.

The EUR/GBP has been in freefall this week, reaching an 18-month low in today’s early U.S. session trade, and the current momentum suggests that the pair could continue its descent down key psychological support at .8000 before bouncing. Looking to the chart, the unit remains in the middle of its recent bearish channel, with room down to the 161.8% Fibonacci retracement of the mid-February to mid-March decline near .8000 before reaching the bottom of the channel. At the same time, the MACD is turning back lower below its signal line, though the deeply oversold RSI indicator could lead to a short-covering bounce if and when rates dip to .8000.
 



Source: FOREX.com
 

Looking at the technical and fundamental evidence, we favor continued weakness in the pair over the next 24 hours, but bearish traders may be compelled to take profits ahead of the weekend, especially if rates drop to test the key .8000 level (1.25 in GBP/EUR). Nonetheless, the market may look to fade any short-term rallies next week as long as rates remain below the 20-day MA and previous-support-turned-resistance around .8100.

About the Author
Matt Weller

Senior Technical Analyst for FOREX.com. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, Matt creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Matt is a Chartered Market Technician (CMT) and a member of the Market Technicians Association. You can reach Matt directly via e-mail (mweller@gaincapital.com) or on twitter (@MWellerFX).

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