EUR/GBP Rejects Key Resistance Ahead of the ECB

EUR/GBP Analysis

The pair once again falters at the pivotal resistance confluence provided by the descending trendline from the November peak and the 38.2% Fibonacci of the last leg down. The rejection sends it lower this week, breaching another critical technical level – the EMA200. This preserves risk for new 2024 lows (0.8496-1), but sustained weakness below may prove hard.

The monetary policy differential is unfavorable, as the European Central Bank appears closer to a pivot. Eurozone inflation returned back to 2.4% y/y in March according to last week's preliminary data and multiple policymakers have pointed to summer rate cuts. Inflation in the UK has also come down substantially, but at 3.4% y/y in February, it is still far from the 2% and the Bank of England likely has more work to do.

On the other hand, the BoE has hinted at peak rates and given economic weakness it has reasons to want to lower rates. Despite stressing that officials are not there yet, Governor Bailey embraced market pricing for 2-3 cuts this year in a Bloomberg interview after the last policy meeting. ^[1]

As such, the two central banks may not be that far apart. This could contain the fall along with an RSI that moves towards oversold level and give the common currency another chance to push beyond the 38.2% Fibonacci.

The trajectory of the pair will be determined Thursday's policy decision by the ECB. A change in rates does not seem likely and all eyes will be on President Lagrade's press conference. She has generally been on the conservative side, but if officials intend to cut, she may need to start laying the groundwork. Any hints towards that could weaken the Euro, but if she sounds hawkish, the pair should rise.