EUR/GBP chipping away at key 0.7370 resistance

Yesterday my colleague Kathleen Brooks outlined the fundamental reasons behind the EUR/GBP’s recent recovery. In a nutshell, it is the euro zone data which continues to surprise on the upside that has given the single currency a shot in the arm. This trend continued after a gauge of German business optimism, released this morning, climbed for a fifth consecutive month. The German Ifo Business Climate edged to 107.9 in March from 106.8 in February, beating expectations of a 107.4 reading. In contrast, data from the UK has been far from convincing of late. Although mortgage approvals rose by an above-forecast 37,300 in February, this came after inflation data yesterday showed the CPI fell to zero last month which further decreased the chances for a Bank of England rate hike this year. On top of this, uncertainty about the outcome of the UK elections is unnerving some investors – and understandably so as there is a good chance we may see a hung parliament.

Ultimately however the Bank of England still looks set to raise interest rates first while the European Central Bank is likely to hold fire until after the conclusion of the current QE programme in September 2016. The diverging monetary policies between the eurozone and UK central banks mean that market participants will find it increasingly difficult to justify remaining long in the EUR/GBP for a sustained period of time. Thus we expect the cross to end its bullish run soon and head back lower, potentially below 0.70 over time.

At 0.7370, the EUR/GBP has recovered a good 5% from the multi-year low of just over 0.7000 it hit on March 11. Here, it is testing the 61.8% Fibonacci retracement level of the most recent downswing. What’s more, the 50-day moving average also converges around this 0.7370 level. Thus, there is a possibility that the EUR/GBP’s kick-back rally may stall around this area and head lower towards the old resistance level of 0.7290, which may then turn into support. If and when 0.7290 is also broken down we could then see a more profound sell-off. However, if the seller’s do not show up around the current level of 0.7370 then the cross may squeeze further higher towards the next resistances at 0.7400, 0.7465 (78.6% Fibonacci level) and then 0.7590 (February high), before making its next move.

Figure 1: