EURGBP approaching key support

EURGBP is approaching key levels on the chart. Let’s take a look and then explore some drivers that could push the pair around.

Starting with the long term view:

Over to the left is the period when the pound weakened substantially against the euro in the wake of the Brexit vote. At one point, commentators were even calling for the pair to trade at parity! Those calls pretty much marked the extreme, and the pair has been trading in a wide range ever since. The two extremes are just beyond 0.93 to the upside and just below 0.83 to the downside.

At the start of 2021, the key support area at 0.8863 broke… followed by a 10 week fall to the 0.85 area. After a swift reversal to 0.87, price has once again continued lower and now approaches the huge 0.83 support zone.

Will it hold?

That’s the million dollar question! Politically, things have moved on in the UK. The government has a clear majority (which equals minimal political uncertainty for investors to digest) and buried well beneath the Covid headlines the initiatives to support and stimulate business & investment have been well-received.

As I type, Boris is odds-on to be ousted as Prime Minister after the Covid-party debacle. Objectively, many politicians have survived worse. Even if he were to ‘step down’, Sunak or Truss are the two leading contenders according to OddsChecker, and both would be seen as business-friendly appointments.

The UK economy has weathered the omicron storm so far, it looks as if the omicron infection rate has peaked, and progress towards the post-Covid environment continues.

The Bank of England has already hiked

And that could give GBP the advantage. The following chart is a rough indicator of UK rate expectations, using Sonia Futures as the proxy.

In the weird and wonderful world of interest rate futures:

• 100 = 0% interest rate
• 0.99 = 1% interest rate
• 0.98 = 2% interest rate

And so on…

As the year goes on, we can see that traders are expecting rates to increase, and by the August expiry (MPQ), rates could well be at 1%, implying three 25bps hikes from the BOE.

By contrast, the ECB has maintained their dovish stance considering inflation to be transitory. In the last round of projections inflation is expected to fall back to 1.8% by 2023, below their long run 2% goal.

Image source

ECB hikes in 2022?

Judging by this, from the last ECB meeting, probably not…

“From October 2022 onwards, we will maintain net asset purchases under the APP at a monthly pace of €20 billion for as long as necessary to reinforce the accommodative impact of our policy rates. We expect net purchases to end shortly before we start raising the key ECB interest rates.”

Market dynamics are fluid right now, and the ECB could change course if inflation remains sticky. For now, the stage is set for rate differentials between the UK and Eurozone to widen which could support the case for a lower EUR vs GBP. A break of that key support level will certainly have traders attention.

Not investment advice. Past performance does not guarantee or predict future performance.