Thoughts on tightening monetary policy get called into question during times of heightened market risk, but of the two central banks the Bank of England is more likely to taper harder and faster, maybe even raise the bank rate, before the ECB. This should translate into a stronger GBP to EUR.
EURGBP Forex Analysis
German inflation numbers out yesterday didn't help the euro, which saw the headline inflation rate jump above 4% in September, the highest level in nearly 30 years. There is still a reluctance on the markets' part to translate normalization policy into more aggressive pricing, and as today's euro zone-wide data is released, the EUR will likely still find itself unable to gain any relative strength, unless there is an about-turn in the direction of the greenback. With the dollar's strong momentum, EUR/USD still looks more likely to test 1.1500 than to rebound to 1.1700 in the coming days. Though we have seen a sweep of the lows translate into a bull move before.
For the pound, it seems despite the recent hawkish repricing of Bank of England rate expectations, the pound has yet to capitalize on the recent swings in sentiment. Probably due to higher energy costs, inflation, and a shortage of goods due to bottlenecks. Even with Governor Andrew Bailey's more cautious comments this week about the recovery outlook, the OIS curve indicates that markets have priced in around 65bp of tightening by the end of 2022, likely due to concerns that higher energy prices will push inflation higher.
Despite the ongoing risk-off environment, any fresh rally in EUR/GBP is unlikely to break the 0.8644 200-day MA for now. The ActivTrades sentiment indicator is showing that the traders on the platform are leaning towards a bullish EURGBP with 60% of them long. This is another reason to look for shorts in the coming sessions.
The H4 chart clearly shows that the 0.8610 had been a level of resistance, which was temporarily a level of support. The current H4 candle is now indicating that the sellers have regained control of that level and are looking to test lower prices. A close of this candle in the red would be a set up for a short trade at the break of the bearish candles low, with a Stop Loss placed above the candles high. It is the start of the new month, and it is a Friday, so I wouldn’t be looking to hold on for a swing trade, just an intraday trade whilst we wait for the USA to sort its monetary and political policies out.
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