The EUR/GBP exchange rate continued its strong downtrend, reaching a low of 0.8226, its lowest level since March 2022 after the European Central Bank (ECB) division. It has dropped by 11% from the highest point in 2022 as the sterling rally accelerated.
Dovish European Central Bank
The EUR/GBP pair has been in a strong downtrend as the UK economy did modestly better than that in Europe.
Recent data showed that the UK has been quite resilient, while most European countries, including France and Germany, have continued to contract.
This weakness explains why the ECB decided to cut interest rates by 0.25%, bringing the year-to-date cuts to 1%. It brought the benchmark rate to 3%.
The bank also hinted that it was prepared to deliver another 0.25% rate cut in its January and March meetings. Those cuts will bring the current interest rates to 2.5%.
The risk is that more cuts will spur spending and stimulate inflation in the region. Recent data showed that the headline inflation rose to 2.3% in November, higher than the central bank’s target of 2.0%.
The ECB is concerned that the bloc’s economy is not doing well, with the de-industrialization process continuing. For example, industrial production in Germany has continued to fall this year.
The ECB is also worried about the US, a key trading partner that will have a new leader on January 20th. Trump has threatened allies and foes that he plans to levy tariffs on most imports in a bid to lower the trade deficit. He also hopes to use the funds raised from tariffs to offset the impact of his tax cuts
Bank of England decision
The next important EUR/GBP news will come out on Friday when the UK publishes the latest GDP numbers. Economists expect the data to show that the economy expanded by 1.6% in October after growing by 1.0% in the previous month. It expanded by 0.1% from the previous 0.1% retreat on a month-on-month basis.
The UK will also publish the latest manufacturing and industrial production data, which will provide more details about the economy.
These numbers will come as the bank prepares to hold its monetary policy meeting next week. Economists expect the bank to cut interest rates by 0.25% in a bid to support the economy.
European and the UK interest rates have led to a carry trade opportunity. Carry trade is a situation where investors borrow from a low-interest-rate country and invest in a higher-yielding one.
EUR/GBP technical analysis
EUR/GBP chart by TradingView
The weekly chart shows that the EUR/GBP exchange rate continued its strong downtrend in the past few months. It has crashed and is hovering at its lowest level in two years.
The pair has remained below the 50-week and 25-week Exponential Moving Averages (EMA). It also formed a death cross earlier this year as the 50-week and 200-week averages crossed each other. Most notably, it has formed an inverse head and shoulders pattern.
Therefore, the pair will likely continue falling as sellers target the next key support at 0.8000 in the long term.
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