EURGBP Bearish Bias Reaffirmed after UK CPI but BoE Looms

一昨日The Bank of England lowered rates last month, for the first time in four years, joining major peers in their shift to less restrictive monetary settings. However, officials adopted a cautious and non-committal approach on further easing, as they remain wary of inflation which they expect to rise further this year. Today’s inflation report will likely strengthen the BoE’s apprehension, as CPI stayed above the 2% target, while core accelerated to 3.6% y/y in August.

EURGPB faces pushback as a result, at the critical resistance cluster provided by the EMA200 (black line) and the 23.6% Fibonacci of the August fall. Bearish bias is intact below that level, sustaining risk for further losses towards and beyond 0.8381. The monetary policy differential is unfavorable for the pair, as the ECB has already slashed rates twice this year and at least one more cut is expected this year.

The Bank of England will have a hard time moving again on Wednesday, but pressure for faster easing pace is likely to increase. Wage growth moderated substantially and this can allow greater tolerance for slower return of inflation to target, while the economy remains fragile, despite exiting its brief recession.

EUR/GBP has contained its fall in recent weeks and a break above the aforementioned resistance cluster would pause the bearish bias and provide the launching pad for taking out the 38.2% Fibonacci. Greater recovery however towards the 61.8% levels looks hard under current policy dynamics.

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