EUR/GBP Forecast: Euro Takes Centre Stage Via ECB Speakers

EUR/GBP ANALYSIS & TALKING POINTS

• ECB continues to dance to the hawkish tune, providing a tailwind for the euro against a more subdued GBP.
• U.S. CPI may provide some impetus ahead of Friday’s key UK and EZ centric data.
• Breakout looming on daily EUR/GBP chart.

FUNDAMENTAL BACKDROP

The euro extended yesterday’s gains against the British pound through ECB officials beginning yesterday. The hawkish narrative was reinforced by one of the more aggressive officials in Isabel Schnabel while today’s addresses included the ECB’s Villeroy who stated the need for additional interest rate hikes in the coming months. Currently, money markets are pricing in roughly two back to back 50bps hikes in February and March. The Bank of England (BoE) on the other hand, is being forecasted to move slightly slower considering they commenced their hiking cycle far earlier than the ECB. That being said, higher relative rate hikes could support euro strength over the next few months.

On the energy side, both the UK and eurozone have benefitted from falling crude and gas prices but with sanctions and price caps on Russia becoming more severe, a retaliation from Russia could see energy costs rising once more.

ECB INTEREST RATE PROBABILITIES

Source: Refinitiv

The economic calendar is pretty light both today and tomorrow with regards to the UK and EZ regions however, tomorrow holds the U.S CPI report that could give the euro some support should inflation show signs oof further decline. Friday (see below) will provide some key UK and EZ data including UK and German GDP (proxy for the EZ region) as well as EZ industrial production.

EUR/GBP ECONOMIC CALENDAR

Source: DailyFX economic calendar

TECHNICAL ANALYSIS

EUR/GBP DAILY CHART

Chart prepared by Warren Venketas, IG

The EUR/GBP daily chart shows price action moving in a sideways consolidatory form representing a rectangle type pattern (pink). Tomorrow’s U.S. CPI read may provide the much need catalyst to breakout from this zone while the Relative Strength Index (RSI) favors bullish momentum – albeit declining.

Resistance levels:

• 0.9000
• 0.8867

Support levels:

• 0.8829
• 0.8800
• 0.8769

IG CLIENT SENTIMENT: BULLISH

IGCS shows retail traders are currently SHORT on EUR/USD, with 70% of traders currently holding short positions (as of this writing). At DailyFX we typically take a contrarian view to crowd sentiment resulting in a short-term upside bias.

Contact and followWarrenon Twitter:@WVenketas