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EUR/GBP Forecast: The Pair Loses Gains Amid UK Reopening and ECB Rising Divisions

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EUR/GBP Forecast: The Pair Loses Gains Amid UK Reopening and ECB Rising Divisions

The EUR/GBP sell-off gained steam after the latest European Central Bank (ECB) monetary policy decision and new concerns over Brexit. It dropped to 0.8540 on Thursday, the lowest level since Friday last week. This price was 1.50% below the highest point this week.

ECB decision

The ECB concluded its two-day meeting on Thursday. In a statement, the bank left its deposit facility rate at minus 0.50% and the general interest rate at 0%. Further, the bank committed to its asset purchase program that is valued at more than 1.85 trillion euros. It expects that these purchases will continue until March next year.

This was an important meeting for three reasons. First, it was the first policy decision since the bank unveiled its policy framework two weeks ago. In this framework, the bank said that it would start targeting inflation at 2% while also allowing it to fluctuate slightly above this level. 

The previous policy framework was for inflation to remain slightly below but close to zero percent. Therefore, in the ECB decision, the bank committed to leaving interest rates intact until inflation rises to 2%, which will be in the next two years.

Second, the meeting came at a time when many European member countries are seeing an uptick in the Delta variant. Countries like France, Germany, and Spain have all seen more cases in the past few months. As a result, some governments are considering adding some more restrictions even as their vaccine rollout intensifies. 

Finally, the decision came at a period when other central banks are starting to move away from their pandemic response tools. For example, in Canada, the central bank has tapered its asset purchases three times already and set up for the first time rate hike later this year. Similarly, the Reserve Bank of New Zealand (RBNZ) will stop asset purchases on Friday.

ECB divisions emerge

The EUR/GBP is also reacting to the rising divisions among ECB members. Central Bank governors from countries like Germany, Belgium, and the Netherlands have strongly criticized the bank’s new policies. 

According to FT, the Bundesbank president complained that ECB conditions were extremely aggressive and risked spurring inflation. Meanwhile, the Netherlands central bank head asked the bank to separate its rates guidance from its QE tapering program. 

Other policymakers insisted that the bank should cut down its 1.85 trillion euro program since the economy is growing faster than expected. Christine Lagarde confirmed that there were these divisions but termed them minor.

The EUR/GBP ignored the new Brexit concerns. Early this week, the UK asked the EU to renegotiate the situation in Northern Ireland. The UK wants a new deal that will remove customs checks between Great Britain and Northern Ireland. The current deal on Northern Ireland was signed in 2019 and was a pivotal part of the overall deal. Tensions between the EU and the UK will have significant consequences on the British pound.

EUR/GBP forecast

The EUR/GBP pair formed a descending channel in the past few months. This week, the pair moved above the upper side of this channel as the UK reopened. It rose to a high of 0.8670 and then erased most of those gains. It has moved below the 25-day and 50-day Moving Averages, while the Relative Strength Index (RSI) has moved close to the oversold level.

EUR/GBP chart

The pair also seems to be forming a head and shoulders pattern. Therefore, there is a possibility it will rebound briefly to form the right shoulder and then resume the downward trend.

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