EURGBP Technical Outlook – Trading the BoE rate hike

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The Bank of England’s monetary policy meeting is scheduled for today. The central bank is expected to hike interest rates by 25 basis points at today’s meeting. The rate hike comes amid continued uncertainty on both the economic and the political front.

The expected rate hike today will be the first from the BoE since July 2007, marking a decade. For the markets, the forward guidance will be of importance as the current rate hike is already discounted by the markets. The rate is, however, unlikely to mark the start of a tightening cycle as it comes after the central bank had lowered interest rates a few months after the Brexit referendum held in June last year.

With inflation peaking near 3%, the rate hike comes in an attempt to withdraw some of the easier policies from the central bank. Inflation is expected to slow down in the coming months largely due to the slower pace of the UK’s economic expansion.

Following the rate hike today, interest rates in the UK will be held steady in the longer term. The overnight markets are expecting to see no further rate hikes from the Bank of England until end of 2018. The Brexit process remains the main issue of uncertainty for the UK’s economy.

EURGBP – Technical Outlook

The euro closed on a bearish note in September and attempted to recover some of the losses saw a brief pullback in prices earlier in October. After posting a high near 0.9032, the EURGBP gave up most of these gains. The price action on the monthly chart suggests some exhaustion in price to the upside.

On the weekly chart, price action has managed to remain above the support level of 0.8837 over the past few weeks. This comes as the bullish flag pattern was seen on the weekly chart.

However, failure to show any bullish signs above this support level could see the EURGBP likely to trade sideways in the near term, weakening the bullish outlook. The strength of the euro currency also comes under the scanner. After last week’s ECB meeting saw the euro declining strongly following the decision to extend QE by another nine-months the euro is expected to trim its previous gains.

EURGBP – Weekly Chart: Bearish flag suggests downside in prices
EURGBP – Weekly Chart: Bearish flag suggests downside in prices

In the near term, the price action behavior over the past few weeks suggests some downside bias. This comes amid the evolving bearish flag pattern show in the chart above. Price remains supported within the zone of 0.8837 and 0.8773.

A breakdown below this support level could validate the short-term bearish flag pattern that will signal a continuation towards the downside. The minimum price target to the downside comes in at 0.8471 – 0.8386.

Such a decline could potentially invalidate any bullish outlook in the longer term. This view is also seen following price action breaking out from the rising trend line which suggests that the euro could be seen posting some declines.

Only a convincing close above 0.9143 – 0.9076 will be able to shift the view back to the upside.

Based on the above, it is quite likely that we can expect the EURGBP to possibly remain volatile in the near term as the markets attempt to understand the BoE’s policies. For the most part, EURGBP could be seen maintaining the sideways range at least until something decisive comes out from the Brexit talks.

As far as monetary policy is concerned, any hints of hawkish commentary from the BoE officials could no doubt quickly see a re-pricing in the markets that would see the British pound strengthening strongly.

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