Euro vs Pound (EURGBP) analysis: Who is the least bad?

EURGBP

The Bank of England (BoE) raised its Bank rate by half a percentage point to 1.75 percent at its August meeting, the highest rate hike in 27 years, owing to elevated inflationary pressures exacerbated by Europe's recent gas crisis.

However, the pound did not surge following the rate announcement since the Bank of England's policy statement painted a bleak economic picture for the coming years, due to a sluggish growth and persistently high inflation outlook. "GDP growth is slowing," and the UK is now expected to enter recession in the fourth quarter of this year, while inflation is forecasted to peak at 13.3% in October.

As the BoE will now take a data-dependent approach, the pound cannot rely on its rate divergence advantage against the euro any longer. Markets will be less concerned about the BoE-ECB policy divergence and more focused on economic indicators in the coming months.

Given that the two economies are exposed to similar shocks and negative effects real incomes and consumption, a sideways phase, characterised by fairly tight trading ranges, could therefore come forward for EUR/GBP in the near term, pending more information on the length and size of the upcoming recessions.

EUR/GBP technical analysis


On a technical level, 0.849-0.85 already represents an area where the euro could see selling pressure. Downwards, 0.834 has shown solid support over the past weeks, despite the market pricing in the BoE’s 50 basis point hike in advance.

Rising RSI and MACD attempting a bullish crossover can provide the EUR with a very slight tailwind in the very short term. However, the single currency lacks the catalysts that could lead to a material appreciation against the pound.

The 5-year yield spread between Germany and the United Kingdom, which has been strongly correlated with the EURGBP exchange rate, should be constantly monitored, to keep track of the relative growth outlook between the Euro Area and the UK economy.