EUR/GBP may rise as the Euro increasingly benefits from a more hawkish ECB

Fundamental analysis

The euro could find some upside momentum in the aftermath of the European Central Bank rate decision this week, particularly against the British pound. EUR/GBP spent most of its time falling in 2021, but that trend appears to be increasingly looking to reverse. It was not that long ago that the ECB was seen as one of the most dovish major central banks, outside of the Bank of Japan.

However, Russia’s attack on Ukraine, rising prices, especially around energy and food, have resulted in traders pricing in an increasingly hawkish ECB. In late December, overnight index swaps were envisioning benchmark lending rates at -0.4% by the end of this year. Ahead of this week’s ECB rate decision, that figure is now seen close to 0.75%.

On the chart below is standardized data for EUR/GBP and the spread between ECB and BoE rate bets one year out. Standardized means both data series have been converted to the same scale. In early March, we can see when the markets started to begin pricing in a more hawkish ECB relative to the BoE. It should be noted that traders still see higher rates from the UK in a year, but the nation’s advantage is seen shrinking.

Unsurprisingly, as traders boosted ECB rate hike bets, EUR/GBP followed higher. Commentary from the ECB has also been coming in more hawkish over the past few months. With traders pricing in half-point hike potential ahead, the central bank may increasingly lay out its path towards normalization to tackle rising prices. That could offer further upside momentum for EUR/GBP.

EUR/GBP technical analysis daily chart

On the daily chart, a rising trendline from April can be seen guiding the pair higher. However, prices were unable to clear the 0.8589 – 0.8619 resistance zone on multiple occasions. Broadly speaking, a bullish ‘Golden Cross’ seems to be forming between the 50- and 200-day Simple Moving Averages (SMAs). That could perhaps speak to a turning, offering a broader upside technical bias.

Clearing resistance would expose the next key zone above between 0.8589 and 0.8619. Beyond that range sit the 100% and 114.6% Fibonacci extensions at 0.8762 and 0.8816 respectively. In the event of a turn lower, a breakout under the rising trendline may not necessarily spell downtrend resumption. The aforementioned SMAs could hold as support, maintaining an upside bias.

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