EUR/GBP rejects 200DMA and 0.8600 level but still on course for solid weekly gains

• EUR/GBP has failed to break to the north of its 200DMA in recent trade and is currently flat on the day.
• The pair continues to trade with significant gains on the week after Thursday’s dovish BoE.  

EUR/GBP tested its 200-day moving average at the 0.8585 mark in earlier trade but has for now failed to break above this key level, or indeed to surpass the psychologically important 0.8600 level. The pair is now back to trading broadly flat on the session just above 0.8560, though this still leaves it about 100 pips higher versus Thursday’s pre-dovish Bank of England policy announcement levels and still well above the next notable level of downside support in the form of the 50DMA at just above 0.8520. If EUR/GBP was to close the week at these levels, it would finish the week with gains of about 1.5%, the best week for the pair since a 2.0% gain posted back at the start of April.

However, from a technical standpoint, the recent rally does not yet seem to signal a shift in the long-term trajectory of EUR/GBP. Since the early April rally, the pair has been quite consistent in that it prints ever lower, followed by ever lower highs. For the long-term bearish technicians, current levels might be seen as another example of an ever lower high, meaning a good selling opportunity.

EUR/GBP fundamentals favour further downside?

From a fundamental standpoint, the argument for a lower EUR/GBP is also there; while the Bank of England is in the midst of a communication nightmare after Thursday’s decision to buck market expectations and hold interest rates, it still seems very likely that the bank will be hiking interest rates in the coming months, as they have indicated would be appropriate if the economy evolves as expected. Contrast that to the ECB; policymakers (led by ECB President Christine Lagarde) successfully managed to tame expectations that the bank would hike rates in 2022 this week. Despite events this week, the ECB is still set to lag the BoE in terms of monetary policy normalisation by a significant degree. That means over the coming months, rate differentials are likely to remain in GBP’s favour.

Meanwhile, downside risks to the Eurozone economy are becoming more apparent. The latest manufacturing production data out of Germany showed that the Eurozone manufacturing remained on a weak footing at the end of Q3 as a result of supply chain disruptions. Manufacturing makes up a much less important proportion of the UK economy. Meanwhile, unlike in the UK, Covid-19 infection, hospitalisation and death rates are rising sharply in the Eurozone right now, which is likely to darken the bloc’s economic outlook for the rest of the quarter and for Q1 2022. This may also weigh on the euro versus sterling.