January 29, 2023

EUR/GBP attempting to correct from weekly lows, bullish correction well underway

  • EUR/GBP bulls are stepping in to guard against a break of weekly lows. 
  • Brexit and the coronavirus are risks for the pound for the days ahead. 
  • EZ inflation readings will be the key event for the euro this week. 

EUR/GBP is firming at the lows of a weekly bear trend near 0.8380 and is steady within a narrow range in Asia between 0.8377 and 0.8390 so far. The price will be determined on the back of the divergences between sentiment for the European Central bank and the Bank of England while Brexit politics will be thrown into the mix as well. 

Bank of England tightening expectations have fallen back a bit due to the coronavirus spread, domestic politics and Brexit as being a toxic cocktail and a major risk to growth prospects. Firstly, Brexit will come roaring back into the headlines this week.

A senior French official said that “At the start of January, January 4 to be precise, we will have meetings with the EU commissioners to define the process and the measures that need to be taken. Between January 4 and January 6, there are very important meetings to begin the legal process against the UK.”  

The pound will also be vulnerable to the prospects of tighter restrictions depending on the spread of the coronavirus. So far, however, the plans are unchanged but voluntary social distancing is already happening and hospitals and under pressure.

The BBC reports that ”Prime Minister Boris Johnson said it would be “folly” to think the pandemic was over and pressure on hospitals would be “considerable” over the coming weeks. Speaking during a visit to a vaccination centre in Aylesbury, he said the “mixture of things we’re doing at the moment” were the correct measures.

Brexit woes in vouge

A more prevalent threat to the pound at the month is UK and European politics. ”The UK will trail other developed countries in its economic recovery from the pandemic in 2022, with economists polled for a Financial Times survey predicting that it will be held back by political uncertainty and the lingering after-effects of Brexit,” the FT reported. The article states that Brexit was damaging trade and exacerbating supply bottlenecks, and political uncertainty looked increasingly likely to deter investment.

” ‘A combination of a ragged edge over Brexit and political uncertainty will continue to hamper what might otherwise have been a strong recovery,’ said Jagjit Chadha, director of the National Institute of Economic and Social Research. ‘Recoveries are driven by optimism about the future . . . Brexit will impose chronic pessimism about the future of the UK economy,’ said Paul de Grauwe, professor at the London School of Economics.”

EZ inflation data slated 

Meanwhile, from the calendar this week, eurozone inflation will be the theme. ”Like in Germany, both energy prices and re-weighting issues are likely to weigh on December’s inflation figures,” analysts at TD Securities explained.

”We think underlying core price momentum is a bit stronger than the consensus, though, yielding a stronger core inflation figure. For headline inflation, we expect a bigger drag from energy prices than the consensus.”

EUR/GBP technical analysis

The hourly chart shows that the price is correcting from weekly lows. Should the bears engage, however, a fresh low could be printed imminently. However, the bias remains to the upside in a phase of consolidation for the foreseeable days ahead until the lows are broken:

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