The EUR/GBP took its sweet time but has now finally reverted back to its mean around the 200-day average circa 0.8750, as we had highlighted the possibility when it was still trading around the 0.92 handle at the end of the summer. Then, we argued that the strength of the euro was becoming a headache for the European Central Bank, which increased the chances of a more gradual exit from the asset purchases programme. As it turned out, the ECB has indeed announced a gradual exit from QE, by tapering the stimulus package by half and simultaneously increasing the duration of the programme by at least another nine months from January 2018. This was a dovish move by the ECB and the euro’s response was a swift drop.
Now the focus is turning to the Bank of England ahead of the so-called "Super Thursday" when it announces the latest policy decision, release the meeting’s minutes and deliver the quarterly Inflation Report. Ahead of this, the pound has been rising sharply and is on course to clinch its sixth winning day against the single currency. While a rate increase should be pound-positive, it is worth remembering that the move is almost priced in. The pound’s response will depend on the market’s view on the future path of interest rate changes in the UK. If the BoE strongly suggests it is a one and done rate increase then there is a possibility that the pound could actually end Thursday’s session lower.
But one way or the other, the direction of the EUR/GBP should become a lot clearer by Thursday’s close of play. Currently, one could make a case for both the bulls and the bears. The bulls may argue that the longer term trend has been bullish on this pair and with price returning to its 200-day average and key support around the 0.8750 area, that traders should be on the lookout for new bullish signals to emerge now. The bears on the hand could point to the fact that price is residing inside a bearish channel and below the 50-day average, which has now turned lower, too. They could point to the fact that the 0.8750 support level has already been tested several times, making a breakdown the more likely outcome this time around.
So, a clean break below the 0.8750 level would sharply increase the bears’ argument while a false break here and a subsequent rally back above the October low of 0.8766 could be potentially bullish. What do we do now? We wait. Let price tell us which direction it is going to take this week then once that becomes clear, entry, target and stop placement should become a lot easier.