Today our focus will remain on Europe as we take a look at the EUR/GBP currency pair. The bullish momentum that began in late October for this pair held up until last week but now appears to have died down significantly. The exchange rate has stayed within a very narrow range around the 0.8550 level for a few days now.
The outlook of the British pound has once again become worse than what characterized most of sterling's movement previously in 2021. The most recent monetary policy meeting of the Bank of England was a massive disappointment. It seems that there is a huge divergence between what the markets expect and what central banks are actually seeing in the respective economies they regulate, as both the BoE and the Federal Reserve in the US seem way more cautious about rate hikes than the markets expected. The Bank of England’s reluctance to raise interest rates even in the face of high inflation has weakened the pound a lot.
In addition, Brexit is once more entering the stage, with an ongoing dispute as to the fate of Northern Ireland and the EU’s customs union. The tricky Article 16 of the Brexit withdrawal agreement has established a hard border between Northern Ireland and Great Britain, effectively separating the UK into two in order to keep Northern Ireland’s trade with the Republic of Ireland (EU member) customs-free.
While this has kept the peace in Ireland, it has caused a lot of tension within the UK, where the status of Northern Ireland has changed for trade purposes. Prime Minister Boris Johnson opposes this, as do loyalist groups within Northern Ireland. In the last couple of days there has been more and more talk of Article 16 getting triggered, i.e. the UK violating it. This would then allow the EU to take legal action against the United Kingdom and potentially mark the beginning of a long and serious trade conflict between the UK and the European Union.
Though this affects both the UK and the EU, so far the fears of a Brexit-related conflict have been more harmful to the pound than they have to the euro. If there is more trouble on that front, expect the pound to weaken further.
In terms of the daily chart, today we have a pivot point for the pair located at 0.8553, with the pair currently trading below it. The daily support levels lie at 0.8540 and 0.8518. The daily resistances are at 0.8575 and 0.8588. The indicators of technical analysis agree in strongly recommending a buy position today.
