EURGBP has been on a steady downtrend, mostly because of the diverging monetary policy biases between the ECB and the BOE. While the ECB has cut several interest rates a couple of times and implemented targeted long-term refinancing operations to boost economic activity, the BOE is moving closer to tightening policy by considering a gradual rate hike scheme for next year.
However, the selloff appears overdone, with price starting to pull back to an area of interest. The pair is currently testing the 38.2% Fibonacci forex retracement level, which might hold as resistance. A higher forex retracement could test the .7900 major psychological level, which has acted as former support.
Forex Retracement Levels
Stochastic is already moving down, reflecting a return in selling pressure. This could push EURGBP back to it previous lows near the .7750 minor psychological level or perhaps allow the pair to make new lows.
Zooming out to a longer-term time frame indicates that price could still make a forex retracement up to a longer-term falling trend line right around the .8000 major psychological level This is slightly above the 61.8% Fibonacci forex retracement level near the .7950 mark, which might also hold as resistance.
Event risks for this forex retracement setup include the UK CPI and jobs data later on this week. Strong figures could lead the trend to resume while weak data might lead to an upside breakout. Bear in mind though that UK data has been relatively strong, confirming the BOE’s bias to start tightening gradually next year.
Meanwhile, data from the euro zone has been mostly weak, particularly in the larger economies such as Germany and France. This could lead to more easing moves from the ECB, in addition to their rate cuts and targeted long-term refinancing operations. With that, the path of least resistance is still to the downside, owing to varying monetary policy biases.
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