EUR/GBP rises to a 2 year high as the pound sinks
The pound plunged across the board in the Asian session, extending the selloff from last week after Chancellor Kwasi Kwarteng’s mini-budget. The budget shocked the market after Kwarteng unveiled the largest tax cuts in 50 years.
Confidence in the UK is collapsing amid fears that the unfunded tax cuts and energy support package will send inflation and government debt soaring.
Over the weekend, Kwarteng said that more tax cuts would come in the new year, which sparked the selloff in the pound as the market opened this week.
Expectations are rising that the BoE could hike interest rates by 1% in November or at least step in possibly as soon as this week.
Meanwhile, the euro is rising versus the pound but falls against the USD amid ongoing concerns about the Russia and Ukraine war, the ongoing energy crisis, and following the Italian elections.
Giorgia Meloni won a clear majority in Sunday’s Italian elections. The first ever Italian female prime minister is set to lead the most right-wing government since the second world war. Concerns are rising about what this means for Italian – EU relations and the Draghi-formulated economic recovery in Italy.
ECB’s Lagarde is due to speak later.
Where next for EUR/GBP?
EUR/GBP rose to a 2-year high of 0.9283, before easing slightly to 0.9030 heading into the European open. The RSI trades firmly in overbought territory, so buyers should be cautious. Also, the long upper wick of the candle suggests that there wasn’t much appetite at the higher prices.
Buyers could look to lift the price back up towards 0.9238 with a break above here, opening the door to 0.9325, the August ’19 high.
On the flip slide, sellers will look towards support at 0.8870, a level that offered support several times across 2020. A break below here opens the door to 0.8730, the June high.
DAX falls ahead of IFO business climate
DAX is heading for a modestly weaker start after falling 3.6% across last week as risk sentiment collapsed.
Central banks across the globe, including the Fed, hiked rates aggressively to tame soaring inflation, raising fears of recession.
Today attention turns to the German IFO business climate index, which is expected to deteriorate after steadying in August. Rising energy costs and surging prices are hurting the outlook. The IFO index is expected to fall to 87 in September from 88.8 in August.
The data comes after PMI data last week suggests that the economy is shrinking at a faster pace.
Where next for the DAX?
The DAX has been trending lower, forming a series of lower highs and lower lows. On Friday, the price fell below support at 12440 to a fresh 22-month low of 12180.
The RSI is in bearish territory, suggesting more downside to come. Sellers will look for a move below 12180 to test 12000 round number before bringing 11300, the September 2020 low, into target.
Buyers will look for a move over 12460 the previous low, opening the door to 12580 and the 20 sma at 12830.