The EURGBP is at some significant lows, but I don’t see much in the data that can get the euro to start trading higher long term. With this framework, I will be looking to sell rallies or trade breakouts to the downside.
Forex Analysis - EURGBP
The markets will be slow again today as many exchanges are closed. However, we have had some Final December PMI data released from the Eurozone. According to IHS Markit, Germany's Manufacturing Purchasing Managers Index (PMI) failed to meet market expectations in December, registering 57.4 instead of the expected 57.9.
Despite a sharp rise in input and output prices, the previous month's performance was explained in part by moderation in inflation rates. According to the report, orders for new products exceeded production capacity during December, leading to another steep increase in backlogs. Buoyed by full order books, German manufacturers are confident about growth prospects in the coming year, though much still depends on an improvement in the supply situation.
Across the rest of the data that came out from Spain, Italy, and France the theme was similar. December was down compared to November which resulted in a Euro Area wide decline. According to IHS Markit, growth in the Eurozone's manufacturing sector slowed in December. Eurozone Manufacturing Purchasing Managers Index (PMI) fell to 58 from 58.4 and reached a ten-month low.
2022 will be dominated by the monetary policies of the Central Banks with a major focus on what the Federal Reserve will do to keep face and some sort of credibility. The ECB has pretty much cemented the idea that they will raise in 2023. They will also maintain a very loose monetary policy with asset purchases. The Bank of England signalled at the end of 2021 that they were entering a tightening phase and possibly a rate hike cycle after breaking the seal and raising the bank rate by 15bps.
This divergence in monetary policy and worsening economic backdrop in Europe is likely to see the EURGBP test lower in the first quarter of 2022.
Despite the fundamentals racking up against the euro, the ActivTrader sentiment indicator shows that there are a lot of bottom pickers still in this market. It makes sense to buy low and sell high but only when the macro themes suggest a dislocation between the drivers and price.
On the daily chart, the EURGBP is clearly making a set of lower highs and lower lows and I am going to assume that 0.8500 will be very strong resistance, especially of the daily 200 EMA drops below that level. For now, I am looking at today’s high as the significant resistance level as it was a pre-Christmas swing low. A close below the last day in 2021 would be confirmation that we are testing towards 0.8300 and beyond.
With the idea being to sell rallies, a touch of the hourly 200-period EMA would be of interest to me to see if that holds as dynamic resistance and any close today below the 20 and 50-period EMAs that are intertwined would also signal a possible short trade set up.
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