ECB Minutes and Christine Lagarde’s dovishness send EUR/GBP lower
Joe Perry January 20, 2022 8:25 PM
Recent and projected near-term inflation is driven by temporary factors that are expected to ease over the course of 2022
Minutes released from the December ECB meeting confirmed the dovishness that some ECB members have been touting for the last few days: recent and projected near-term inflation is driven by temporary factors that are expected to ease over the course of 2022. As recent as Thursday, Christine Lagarde echoed these comments, thus showing that even with EU CPI at 5% she still remains dovish. Lagarde continued by saying that the ECB has “every reason not to react as quickly” as the Fed. Similar comments were made this week by the ECB’s Villeroy, who said that inflation should fall back under 2% by year end.
Recall from the December ECB meeting that although the ECB is ending its Pandemic Emergency Purchase Program (PEPP) in March, it will still buy bonds under the Asset Purchase Program (APP) at a pace of EUR40 billion in Q2 and EUR30 billion in Q3, before returning to the current EUR20 billion maintenance level. Members also said that they see inflation above their 2% target for most of 2022, and only see 1.8% inflation for 2023 and 2024.
What does this mean for the Euro vs a currency, such as the Pound, whose central bank is raising rates? Typically it means that the Euro will go lower. Indeed, EUR/GBP has been in a long-term downward sloping channel since April 2021. However in August 2021, the pair became more volatile and began trading on either side of the channel, thus creating an even wider channel (green). On Thursday, after Christine Lagarde’s comments and the ECB minutes, EUR/GBP broke out of the larger channel to its lowest level since February 2020!
Source: Tradingview, Stone X
On a 240-minute chart, we can see that price has not only broken below the bottom trendline of the channel, but also below the 127.2% Fibonacci extension from the lows of November 19th 2021 to the highs of December 8th 2021, near 0.8321. First support is at a confluence of the February 2020 lows and the December 2019 lows near 0.8282 and 0.8276 respectively. Below that is the 161.8% Fibonacci extension of the previously mentioned timeframe near 0.8244. However, notice that the RSI is diverging with price, an indication EUR/GBP may be ready to bounce. Horizontal resistance is at 0.8336, then the previous support level at 0.8380. Above there, once again previous support is resistance at 0.8416.
Source: Tradingview, Stone X
While the ECB remains dovish, the BOE is hawkish. Markets have fully priced in a rate hike for the February 3rd meeting. If this dynamic continues, there could be more downside for EUR/GBP in the near-term.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.