The Pound has recently been bolstered by expectations of further rate hikes by the Bank Of England as inflation still stands tall at 8.7% and well above the 2% target. On the other hand, the European Central Bank is committed to driving inflation down to 2%, with the latest preliminary reading pointing to a 6.1% reading.
The Euro Area’s retail sales year-on-year were in the negative but better than expected, supporting a bullish case for the Euro this week. In contrast, the U.K.’s retail sales were much lower than expected, giving up a bearish signal for the Pound. Traders reacted positively to the fundamental data, taking the EURGBP currency up 0.13% in early morning trade.
The EURGBP currency pair was cornered into a downtrend, with price trading within a descending channel pattern that crossed below the 100-day moving average. Support and resistance were established at the 0.85750 and 0.88338 levels, respectively.
A breakout below the descending channel pattern sent price action into freefall before being caught at the 0.85750 support level. A rejection is currently at play, as the support level forms a major demand zone. If bullish volumes pile into the market, price action could be led north, with the 61.80% Fibonacci Retracement Golden Ratio the most likely point of interest for a bull case.
Alternatively, if bullish volumes subside, it could indicate a weak bullish market, with a reversal likely to play out. If bears do find their way back to the market, the 0.85750 level could provide a short-term trading opportunity.
Both the U.K and Euro Area have some way to go before lowering inflation to their shared 2% target, but the EURGBP currency pair has moved lower on expectations that the Bank Of England has its work cut out for them beyond the European Central Bank’s. The 0.85750 could materialise if the BOE commits more interest rate hikes to tame inflation than the ECB in the short to medium term.
Sources: Reuters, TradingView