EUR/GBP Forecast: Expecting a re‐test of 0.7050

The EUR/GBP pair is likely to end the current week with losses, after being rejected at 0.7268 levels earlier this week. At the moment, the pair is trading at 0.7183 after the shared currency took a bigger hit against the USD compared to the British Pound due to an uptick in the US core inflation numbers.

The theme ‐ EUR under performing GBP – is likely to continue over the next two weeks or so. This is likely to result into EUR/GBP pair falling back to 0.7050 levels.

Why GBP could be favored over EUR?

1. Falling bond yields in Core Eurozone – The German benchmark bond yield dropped to fresh record lows for last three consecutive sessions. The 10‐year yield hit a record low of 0.049%. The yield on the 8‐year bond yield fell below zero levels and the 9‐year is threatening to do the same. A number of reasons could be cited – safe haven flows into Germany on account of the Greek issue, ECB Mario Draghi reassuring markets about availability of bonds and commitment to go through with the QE program till September 2016.
Meanwhile, the UK Gilt yields are far from zero levels. At least till elections are over with, we are unlikely to see any big dovish or for that matter even hawkish surprised from the Bank of England. That leaves the British Pound entirely at the mercy of election opinion polls and economic data. Though the possibility of a hung parliament is high, still the British Pound could hold its own against the Euro on the back of bond yield spread and relatively hawkish BOE.

2. Greece issue takes center stage next week – The EUR sellers are likely to come back in full force next week as Greece issue takes center stage. Negotiations between Greece and its creditors seem once again, to hear towards a dead end. This is clear from the slump in German yields and rise in Greece, Spain and Italian yields. Greece has payments coming due to the IMF in the amount of EUR 195mn on May 1 and EUR 745mn on May 12. In addition, regular pension and wage payments have to be met at the end of April. The IMF has already said it would not support a payment delay if asked for one by Greece.
In any case, Greece needs financing before the April end. However, for that, the Eurogroup needs to accept the list of reforms in its meeting on April 24th, that Greece would send next week.
It means the EUR is likely to remain under pressure at least till April 24th. If the reforms list is approved and financing is released, then the EUR could rally. However, markets are preparing for the bad news, which is evident from the action in the core and periphery bond yields. Thus, any uptick in the EUR/GBP pair is likely to be sold till April 24th.

The only factor at the moment that could play a spoil sport, is the election uncertainty in the UK. Even if we assume that election uncertainty does hit Pound hard next week, still the EUR may not be able to rise significantly against the GBP; courtesy of Greek issue. Thus, the outlook stays bearish so long as the pair trades below 0.7240‐0.7250, which brings me to the technical factors.

The pair breached a double top formation earlier this week. However, the USD sellers ensured both EUR and GBP rallied almost toe‐to‐toe, thereby restricting EUR/GBP to a range of 0.7160‐0.7240.

From a technical point of view, it is interesting to note that the pair has repeatedly failed to rise back above the double top neckline resistance at 0.7221. The daily and the weekly RSI are well above the oversold region, but below 50.00 levels as well, indicating further room for sell‐off. On monthly charts too, the pair was rejected around 5‐MA currently located at 0.7388, after which the sell‐off was extended. Hence, there is a high possibility of the pair extending its losses over the next two‐weeks to 0.7050 levels.