EUR/GBP rally capped at 0.8855; remains steady at two-month highs

• The Euro hits resistance at 0.8855 after rallying to fresh two-month highs.
• The Pound remains vulnerable on BoE's dovishness.
• EUR/GBP seen at 0.85 in one year time – Danske bank.

The Euro rally from 0.8800 seen on Tuesday’s European market session, has found resistance at 0.8855. The pair, however, remains steady at two-month highs, above 0.8830, with mid-October’s peak, at 08865 on sight.

The Pound, on the defensive on the back of a dovish BoE

The Sterling has remained on the back foot over the last few days, which has helped the Euro to appreciate nearly 3% over the last two weeks. The Bank of England delivered a “dovish hike” after their December monetary policy meeting, which has acted as a headwind for the GBP.

The bank slowed down the monetary tightening pace with a 0.5% hike and with two of the nine committee members voting to leave rates unchanged. This suggests that the bank’s normalization cycle might be approaching its end.

In a quiet post-Christmas market, with a thin macroeconomic docket, the euro is trading moderately higher, underpinned by a solid EUR/USD amid the softer tone of the US Dollar. News that China is planning to end quarantine for inbound travelers has boosted risk appetite, weighing demand for the safe-haven USD.

EUR/GBP seen lower over the coming months – Danske Bank

Looking forward, analysts at Danske Bank maintain a negative outlook on the pair: “We remain cautiously optimistic that the cross will head modestly lower as a global growth slowdown and the relative appeal of UK assets to investors are positive for GBP relative to EUR (…) Forecast: 0.87 (1M), 0.86 (3M), 0.85 (6M), 0.85 (12M).”

Technical levels to watch