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EUR/GBP rebound given selling opportunity after BoE-fuelled sterling selloff


MongiIG

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EURGBP gains look likely to reverse as the reality of BoE vs ECB rate projections kick back in.

bg%20euro%20pound%20eur%20gbp%20aud%20doSource: Bloomberg
 Joshua Mahony | Senior Market Analyst, London | Publication date: Friday 12 November 2021

EUR/GBP has been on the rise over the course of the past week, with the Bank of England (BoE) decision to keep rates on hold dampening bullish sentiment for the pound.

However, there is reason to believe this could be the beginning of a fresh bearish phase for the pair, bringing an opportune moment to look for shorts. While the BoE took a more cautious approach at the November meeting than many expected, they are still expected to be well ahead of the European Central Bank (ECB) when it comes to raising rates.

The chart below highlights exactly that, with markets pricing in a strong chance that rates rise in December. A comparison between the BoE base rate and ECB deposit rate highlights the fact that markets are predicting a rapid ramp-up in UK rates compared with the eurozone.

While predictions that the UK base rate will top 1% before the end of 2022 may be a little lofty, there is a wide acceptance within markets that the BoE looks set to act first. That widening differential between UK and eurozone rates does provide a potential carry trade benefit that favours those long the pound against the euro.

BOE_VS_ECB_RATES.png

 

Looking at the daily EUR/GBP chart, we can see that the recent rebound has taken us into the confluence of trendline, 200-SMA (simple moving average), and 76.4% Fibonacci resistance.

This looks a prime moment for the pair to turn lower and continue the long-term downtrend.

EURGBP-Daily-2021_11_12-14h26.pngSource: ProRealTime

 

From a four-hour perspective, it all ties together as price turns lower from another intraday 76.4% Fibonacci level (0.8573).

With price falling through channel and 0.8543 support, there is a good chance we start to see the bears come into prominence from here. There are no guarantees that this will play out as perfectly as it looks to be shaping up, but certainly things appear set up to bring a bearish turnaround for the pair.

A break up through 0.8658 would serve to reverse the long-term downtrend that is the basis of this trade idea. However, for near-term a rise through 76.4% resistance at 0.8598 would also act as a key threshold that needs to hold for confidence in this turnaround to remain steadfast.

EURGBP-4-hours-2021_11_12-14h20.pngSource: ProRealTime

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