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The momentum in EURGBP should keep leading price action lower

Currently, not much is going well for Europe. With monetary policy diverging from the Fed and other major central banks, European manufacturers will find exports easier as the euro depreciates but this may prolong the inflationary pressures of imported goods and services like energy. The European countries need to get on top of the COVID-19 resurgence or fear losing more economic ground and stability.

Forex Analysis – EURGBP

As a result of the announcement that Austria will become the first western European country to impose widespread restrictions, the EURUSD fell sharply on Friday to an intra-day low of 1.1250. The heavy euro dragged down the EURGBP to give the currency pair its biggest drop in one week since the beginning of the year.

Austria has begun the fourth lockdown, which is expected to last for at least 20 days. It is clear from previous lockdowns that closing all non-essential retail, restaurants, and recreation services will have a negative impact on economic activity in the near future. Furthermore, the Austrian government has made vaccination against COVID mandatory. A number of governments have already taken steps to restrict the activities of unvaccinated individuals, which is going to be socially and economically damaging in the long term.

Speaking at an event on Friday, President Lagarde didn't address the technicalities of imposing new European lockdowns but did speak on the inflationary pressures being witnessed. “We must not rush into a premature tightening when faced with passing or supply-driven inflation shocks.” ECB communication appears consistent with a pullback in bond buying which can be currency negative in a Euro Area context, due to the effect on sovereign spreads. Combine that with poor economic output due to supply chain disruptions and the uncertainty around public health and there is little to be bullish on the euro left.

With that said, the ActivTrader sentiment indicator shows a high proportion of traders on the platform are expecting to see some value buyers stepping in at these lower levels. I am expecting these traders to get squeezed out of their shorts a lot lower down.

On the daily chart the sell the rip traders have recently used the daily 200 ema as a great place to look for a new short or to add to current short trades. The 2-day consolidation from Thursday to Friday should break to the downside as momentum is favoring being short, price action is weakening and there is a clear target to the downside at 0.8300.


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