EUR/GBP May Be Vulnerable with UK Retail Sales, ECB and BOE on Tap

The British pound is the day’s strongest major currency as traders look ahead to tomorrow’s UK retail sales report, which is expected to print at +0.5% m/m.

That report is arguably the last significant macroeconomic release of the week, though looking ahead to next week, traders will be sure to key in on the European Central Bank meeting. In our view, the ECB will likely remain on hold after aggressive easing actions in Q4 2019, but with traders pricing in about a 60% chance of a rate cut from the Bank of England later this month (and near 100% odds of a hike in H1),  even a neutral outlook is likely to appear hawkish relative to the ECB’s neighbors on the Northern side of the English Channel.

All of the above puts EUR/GBP in the crosshairs over the next couple of weeks. Technically speaking, the pair is testing the top of its bearish channel off the August high near 0.9300. More recently, the pair has formed a sideways range between 0.8460 and 0.8580. When rates tested the confluence of the bearish channel and the top of that range earlier this week, they formed a “dark cloud cover” candlestick pattern, showing a shift from buying to selling pressure and marking a potential top in the pair:

Moving forward, a weak UK retail sales report could be a near-term catalyst to take EUR/GBP back toward the bottom of its range near 0.8460, while a break below that area could open the door for another couple hundred pips to the downside as we move through Q1. To shift the bearish medium-term bias, traders would need to see a confirmed break above the 0.8580 resistance level.