Currency Pair of the Week: EUR/GBP

With the ECB and unlocking in the UK, EUR/GBP has already shown that there is potential for volatility

Brexit 5

The European Central Bank meets this week and expectations are for members to leave rates unchanged while maintaining its Pandemic Emergency Purchase Program (PEPP) at 1.85 trillion Euros. The bond buying program is currently expected to end in March 2022.  However, the focus of the meeting will be on the statement and the communication its new inflation targeting.   Inflation “close to but below” 2% has been replaced by “symmetric 2%”, meaning that the central bank is willing to let inflation run hot over the medium term.  Inflation data released Friday showed that headline inflation for June was 1.9%, which the ECB has forecasted it to rise to 2.5% by year end, before falling to its 2% target in the medium-term during 2022.  

Everything you need to know about the ECB!

The delta variant of the coronavirus seems to be picking up steam in Europe, as it is in many parts of the world.  Spain and Portugal have been hit particularly hard by the variant which appears to be twice as contagious then the original virus. Curfews and new restrictions have been put in place to try and stop the spread of the spread across the continent, despite increases in vaccinations.  The UK is not left out of this conversation.  With “Freedom Day” on Monday, in which all major restrictions have been lifted, the timing couldn’t be worse.  Despite warnings from scientists that the reopening could lead to a significant increase in new cases, Prime Minister Boris Johnson is moving forward with the grand event.  This comes as Health Minister Javid announced that he has coronavirus and Johnson heads into self-isolation.  Vaccinations are at the forefront of all countries to try and stop the spread of the virus. With the unlocking at hand, all eyes will be watching to see if it leads to a spike in new cases.

Which leads to the Bank of England. Last week, bullish members Ramsden and Sauders  were hitting the wires talking about continuing to taper its asset purchase program.  At the May BOE meeting, the central bank tapered its bond buying program from 3.4 billion pounds a week to 4.4 billion pounds per week. However, just today the BOE’s Haskel was on the other side of the spectrum, noting that it is too early to tighten policy.  Policy direction will most likely depend on the direction of the variant after the reopening during the next few months!

EUR/GBP broke down from a long-term symmetrical triangle in January near 0.8935 and proceeded to move lower to 0.8471 on April 5th.  It then formed a descending wedge.  The pair retraced to the target of the descending wedge on April 16th near 0.8731 and pulled back.  Since then, the pair has been trading in a range between those two levels.

Source: Tradingview, City Index

On a 240-minute timeframe, EUR/GBP has been in a shorter-term descending wedge (within the daily range) since the end of April.  After 2 failed attempts of breaking above the wedge, price finally appears to have broken out in earnest and on its way to the target of 0.8720.  The target for a descending wedge is a 100% retracement of the wedge.  There is short-term horizontal support near current levels at 0.8615 and then at the downward sloping, top trendline of the wedge near 0.8600.   If price breaks the top trendline, the bottom trendline will come into place near 0.8505, just ahead the horizontal lows at 0.8471.  If price can maintain its upside momentum, horizontal resistance is at 0.8674, ahead of the 100% completion of the wedge and near the top of the long-term range at 0.8720/0.8736.

Source: Tradingview, City Index

With the ECB and unlocking in the UK, EUR/GBP has already shown this week that there is potential for volatility.  If the ECB leans towards the hawkish side or if there is a spike in coronavirus cases due to the unlocking, the volatility in EUR/GBP could continue!

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