EUR/GBP Finds Support Within Descending Channel, Eyeing 0.8450

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Key Talking Points:

  • EUR/GBP attempts to build momentum but faces tough resistance
  • Sellers will be aiming to breach the lower bound of the channel

EUR/GBP is back on track and has finally managed to break below 0.85. The pair had been sticking firmly to a descending channel since mid-April but got side-tracked three weeks ago when the Pound suffered a bearish run on the back of the highly expected “freedom day” leaving investors with questions about the resurgence of new cases in the UK.

EUR/GBP Daily chart

EUR/GBP Finds Support Within Descending Channel, Eyeing 0.8450

But momentum quickly corrected and EUR/GBP was back to its channel pattern, although the pair was struggling to break below 0.85. And once again the Bank of England had delivered, being able to deliver a positive outlook without sparking a hawkish response in the markets, which has seen the Pound strengthen against the Euro. One of the key takeaways from the meeting was the reduction in the threshold set to start reducing asset purchases, brought down to 0.5% from 1.5% as the bank had realised that reducing the balance sheet would likely not happen if the rate was set so high, showing willingness from the central bank to pave the way for changes in monetary policy in the coming months.

On the Euro side, there seems to be a bit more of a split between policy members when it comes to deciding which route to take. Lagarde has been adamant on keeping monetary policy ultra-flexible until the economy is showing meaningful improvement, but there have been some strong dissenters over the last few weeks, with the latest being Jens Weidmann, stating that the ECB must tighten policy to counter inflationary pressures rather than financing costs from eurozone states.

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Looking at the chart, EUR/GBP is still finding support along the way despite it being confined to the descending channel. The latest area to halt selling pressure has been 0.8470, which has held since Friday and has managed to give the pair a bit of a bunce higher this morning. The daily candlestick formation so far is showing some indecision on behalf of investors as the body is shortening, leaving tails either side. I would expect 0.85 to act as resistance going forward so buyers are likely to have a tough time to get a meaningful break higher, whilst sellers will have to aim below 0.8470 to get another chance at breaking the lower bound of the channel, with support likely to arise around 0.8450 aswell.

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— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin

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