EUR/GBP Price Stalls Ahead of Fresh Multi-Year Lows

[MongiIG]

The widening interest rate outlook between Sterling and the Euro continues to weigh on the pair, bringing new multi-year lows into view.

EUR/GBP Price, Chart, and Analysis

• EUR/GBP remains pointed lower.
• UK PM Johnson is under pressure over breaking lockdown rules.

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EUR/GBP continues to edge lower and remains near levels last seen nearly two years ago. The move lower off the December 8 recent high has been driven by Sterling’s strength and Euro weakness, leaving the pair with nowhere to go but further down. Sterling’s strength, driven by the 15bp rate hike at the end of 2021 and the expectations of further rate hikes this year, is likely to continue although politics may dent ongoing bullish sentiment. UK PM Boris Johnson is currently unable to keep himself out of the headlines, all of which have been negative, with the latest revelations that he broke his own rules and attended another party during lockdown called ‘utterly indefensible’ by one Conservative MP. Douglas Ross, the Scottish Conservative leader said that if the PM did attend the party on May 20, 2020 then he should quit, adding that he could not ‘in any way support the Prime Minister if he broke the law and attended the party’. Boris Johnson is now odds-on with most bookmakers to be out of a job by the end of this year.

If UK politics flare up then Sterling may stall its recent rally, but the underlying fundamentals remain positive for the British Pound against the Euro. With the Bank of England already underway in its fight against inflation, the interest rate differential between Sterling and Euro will continue to widen over the coming months, boosting GBP. The weekly chart shows the pair now closing in on the December 2019/February 2020 double-low around 0.8275 and a break below this level of support would see EUR/GBP back at levels last seen in mid-2016.

EUR/GBP WEEKLY PRICE CHART JANUARY 12, 2022

The daily chart is showing signs of a bullish divergence, with the CCI indicator moving higher and the cash price moving lower, suggesting that the pair may reverse higher. Any move higher however is likely to be short-lived with the recent double-top at 0.8373 the first level of resistance before a cluster of prior lows around 0.8385.

EURGBP DAILY PRICE CHART JANUARY 12, 2022

Retail trader data show 77.60% of traders are net-long with the ratio of traders long to short at 3.46 to 1. The number of traders net-long is 0.34% higher than yesterday and 12.85% higher from last week, while the number of traders net-short is 9.87% higher than yesterday and 23.67% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests EUR/GBP prices may continue to fall. Yet traders are less net-long than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/GBP price trend may soon reverse higher despite the fact traders remain net-long.

What is your view on EUR/GBP – bullish or bearish?

 

Jan 12, 2022 |  Nick Cawley, Strategist. DailyFX