EUR/GBP extended its two-week surge on Tuesday as markets prepared for a busy few weeks of central bank decisions and potential geo-political risk events in both the UK and Eurozone.
In the Eurozone, the European Central Bank (ECB) issues its monetary policy decision and holds its press conference on Thursday. Eurozone inflation has been on the rise, but the ECB is not expected to switch gears on its extensive QE program just yet. If, however, the central bank provides hints of QE tapering on Thursday in reaction to rising inflation, the euro could receive a further boost against the pound.
Upcoming risk events in the Eurozone are largely political. The Netherlands is scheduled to hold its presidential election on March 15th. Populist candidate Geert Wilders is running a very close race with incumbent PM Mark Rutte. While less far-reaching from a broader European perspective than the subsequent French elections – in which anti-EU populist candidate Marine Le Pen is also running a strong race – the Dutch election could serve as a precursor to what happens in France. In the event of populist victories in Europe, the future of the European Union and the euro currency could be placed in serious jeopardy.
In the UK, the most pressing matter will be the UK’s annual budget release on Wednesday. With President Trump’s highly-touted fiscal spending promises having helped lift the US dollar and US equity markets, the spotlight now turns to the UK. If the UK budget release is seen to be in stark contrast with Trump’s ambitious promises, the pound could be further pressured against the dollar. Next week holds the Bank of England’s (BoE) rate decision and policy summary, a day after the highly-anticipated rate decision from the US Federal Reserve. BoE monetary policy is expected to remain steady, but any surprises in policy or tone will likely have a marked effect on the embattled pound.
On the UK political front, of course, is the triggering of Article 50 later this month, which will begin the long process of formal separation between the UK and EU. Fears of a catastrophic fallout from Brexit have yet to materialize. However, that has not stopped the British pound from being seriously pressured to extreme lows against the US dollar in recent months. Further concerns for the pound amid the impending triggering of Article 50 could lead to more losses for GBP/USD back down to its 1.2000-area lows and below.
For EUR/GBP, the rise since late February has highlighted these mounting pressures on the pound. From a longer-term perspective, EUR/GBP is following a clear uptrend. After reaching its recent high around the 0.9100 level in October, however, price has dropped rather sharply. Currently, the rebound of the past two weeks has once again pushed EUR/GBP up towards key 0.8700 resistance and an important downtrend line extending from the noted 0.9100 October highs. Amid the central bank decisions and many risk events in upcoming weeks, any strong breakout above resistance could lead to an extension of EUR/GBP’s entrenched bullish trend. In the event of a resistance breakout, the next major short-term targets to the upside are at 0.8850 resistance followed by the 0.9000 psychological resistance level.