Cable, EUR/GBP Sink to Multi-Year Lows – New Key Levels to Watch

[MongiIG]

GBP/USD (CABLE), EUR/GBP ANALYSIS

• Cable (GBP/USD) sinks below significant zone of support as the liquid, safe-haven US dollar soars
• European economy susceptible to double-pronged squeeze: demand and supply
• EUR/GBP drops below 2020 low: New key technical levels analyzed

 

CABLE VULNERABILITY ACCELERATES

GBP/USD has been trending lower since the 2021 high, albeit in a rather choppy fashion. The latest spate of volatility however, has broken new ground - to the downside - and now approaches 1.3000.

The US dollar remains heavily bid as conflict in Ukraine and increasing economic sanctions against Russia add to the uncertainty surrounding global financial markets. The Pound, which benefitted from accommodative monetary and fiscal policy during the recovery, has taken a turn for the worse as global risk appetite sours.

Cable broke through the previous major zone of support (1.3200 – 1.3280), now testing the December 2021 lows around 1.3160. The daily chart shows that there is little standing in the way of continued selling with the psychological level of 1.3000 as nearest support with 1.2770 thereafter.

However, the pair has just entered oversold territory according to the RSI, meaning there is a slight chance we see a minor retracement. It is important to keep in mind that in strong trending markets (particularly when trading USD crosses during global conflict) that markets can remain in oversold/overbought territory for extended periods of time. Therefore, such indicators can be viewed as presenting the possibility of a minor reprieve which GBP/USD bears could look to for better entries into the existing trend.

GBP/USD Daily Chart

Source: IG, prepared by Richard Snow

 

EUROPEAN ECONOMY SUSCEPTIBLE TO DOUBLE-PRONGED SQUEEZE

The Euro has declined with no real end in sight. Relatively accommodative monetary policy compared to other major central banks (Fed, BoE) has resulted in weaker EUR/USD and EUR/GBP crosses.

The European economy is vulnerable to supply and demand side challenges. On the supply side, supply chain disruptions will weigh on production, while higher energy costs and a lower purchasing power of the Euro are set to curb demand.

Adding to the mix, the diverging paths of monetary policy as the Bank of England is expected to have raised rates a further 4 or 5 times by the time the European Central Bank is anticipated to hike for the first time, in Q4 this year. An increasing interest rate differential favors the Pound to the detriment of the Euro and market participants will be listening intently to what ECB President Christine Lagarde says at the March 10th ECB Meeting regarding the economic impact of the Ukraine conflict and the timing of future rate hikes.

Looking at the EUR/GBP pair, trading continues below the 2020 low of 0.8275. In fairness, the pair was already well on its way to trading below the 2020 low, the conflict in Ukraine just accelerating the longer-term downtrend.

EUR/GBP Daily Chart

Source: IG, prepared by Richard Snow

The significance of the long-term downtrend amid the recent volatility really becomes apparent when a weekly chart is needed to gauge future levels of support. In the case of EUR/GBP, those levels are 0.8125 and 0.8040.

EUR/GBP Weekly Chart

Source: IG, prepared by Richard Snow

 

MAJOR RISK EVENTS IN THE WEEK AHEAD

Last weeks NFP print reminded markets that ‘high importance’ event risk is still relevant within the context of the Russia-Ukraine conflict. This week, we have two stand out events: ECB rate decision and US inflation data.

The Euro could regain some losses on Thursday if market participants perceive Christine Lagarde’s comments as hawkish, in a similar fashion to the previous ECB presser. US CPI data could land up having little effect on the in-demand dollar. Adding to this, Jerome Powell all but confirmed there would be a 25 basis point hike on the 16th of March.

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--- Written by Richard Snow for DailyFX.com. 7th March 2022