EUR GBP faces important test ECB BoE and UK data

It is going to be a very important week and a half for the EUR/GBP. The popular currency cross has managed to bounce back after a two-week drop when traders responded to the surprisingly strong improvement in UK data. Understandably, not many people are willing to have any bold positions in the euro ahead of today’s policy decision from the ECB and Mario Draghi’s press conference. Thus, the EUR/GBP has climbed in part on position squaring. In addition, some dovish comments were made by the Bank of England Governor Mark Carney on Wednesday which weighed on the pound.

Although virtually no one is expecting to see any changes in ECB’s policy stance at this particular meeting, there is a possibility that Mario Draghi may signal the ECB’s intention to further loosen its monetary policy in the coming months. In this regard, comments about expanding the size or duration of QE, if seen, could weigh on the EUR/GBP further. In addition to the ECB today, there is also some significant UK fundamental events to look forward to next week. Among other things, the latest CPI measure of inflation will be released on Tuesday, followed by employment and wages data on Wednesday and then the Bank of England’s latest policy decision and minutes from its last meeting, on Thursday.

So there’s plenty of fundamental events that could impact the EUR/GBP in the coming days. I think that the ECB will do its best to deliver a confident message without sounding too hawkish for the euro to climb substantially today. As far as the Bank of England is concerned, I don’t think we will see any further easing steps this year and probably not until at least after the Article 50 is triggered. With rates already near zero, the MPC will certainly want to keep their powder dry for when the process of Brexit actually starts. Consequently, I believe that the worst of the selling is over for the pound, especially against currencies where the central bank is still dovish – such as the euro.

Technical outlook: EUR/GBP about to resume downtrend?

So, with that in mind, what does the chart of the EUR/GBP telling us? Well, a quick glance at the weekly time frame shows a clear breakout above the long-term bearish trend line while the 55 and 200 week moving averages are both turning higher. Some would therefore argue that the EUR/GBP’s trend is actually bullish. Well, they wouldn’t be wrong. But it doesn’t necessarily mean that the trend is going to continue for the foreseeable future. Indeed, with the EUR/GBP already reaching and retreating from the long-term 61.8% Fibonacci retracement level (0.8710) and having completed a basic 5-wave Elliott count in the process, the near-term trend may have already turned bearish once again. What’s more, the inability of price to hold above the July high of 0.8625 is a further bearish development, as is the breakdown back below the psychological 0.85 level.  In other words, despite the “Brexit” vote and the BoE’s easing steps, the EUR/GBP failed to move further higher. This is bearish.

Speaking of the 0.85 handle, this is where I am expecting the EUR/GBP to turn lower from as we approach it. As well as a psychologically-important level, 0.85 was previously support and so it may now turn into resistance. In fact it is the area around the 0.85 level that I am interested in, with an intermediate resistance level coming in just below it at 0.8485 and the 50-day moving average slightly lower still at 0.8475 (see the daily chart in the inset). However, should the ECB deliver a hawkish message and/or data from the UK or otherwise causes the EUR/GBP to break back above the 0.85 handle, then we may see a much deeper pullback, perhaps to the 61.8% Fibonacci level against its most recent high at 0.8575 or the previous support at 0.8590, before it potentially starts to retreat once again.