What needs to happen for EUR/GBP to reach its 2020 low?
Today’s ECB rate meeting has sent the Euro lower vs the British pound, and there is an increased chance that we see an even lower EURGBP in the weeks ahead.
ECB turns dovish
In their latest interest rate meeting, the ECB announced that, like the Federal Reserve, the ECB would allow inflation to overshoot its 2% target. The reason for this is that inflation had remained below the 2% percent target for almost ten years, as the European central bank had always started to increase interest rates well before inflation reached 2%.
As the ECB consistently increased borrowing costs to keep inflation in check, it is also suspected to have kept economic growth trapped at low levels. The change in strategy now means that inflation will be allowed to be above the 2% mark, which could help economic growth to pick up.
What does it mean for EUR/GBP?
For the Euro, the latest news is bearish as it means that the ECB will further delay interest rate hikes and the removal of quantitative easing. The latter is set to end in March 2022.
UK annual inflation is at 2.5%, whilst core inflation is at 2.3%. Euro-area annual inflation is at 1.9%, whilst core inflation is at 0.9%. The latter has never been too important for the ECB in the past, but it is still likely a critical factor that they take into consideration. If it was just due to core inflation, then we are looking at years of low interest rates.
In the UK, the Bank of England is also not ready to increase interest rates, but the higher headline and core inflation are making it likely that the Bank of England will act first. The fundamental outlook is therefore suggesting EURGBP might trade lower in the months ahead.
EUR/GBP technical outlook
EURGBP remains near its 2021 low of 0.8473, and for now, the price would need to trade below the 2021 low for the bearish trend to resume. Until this happens, the price will likely remain trapped between 2021 low and April 2021 high of 0.8721, with a break to the latter level possibility opening the pathway for a move to 0.90.
If the price trades below the 2021 low, the exchange rate might reach the 2019 and 2020 low of 0.8271.
EURGBP Weekly Chart
Author
Alejandro Zambrano is ATFX’s Global Chief Market Strategist. He combines extensive professional experience and a pragmatic attitude to trading, building clients’ understanding of the markets and the rationale behind investing.
