The Euro is bouncing back from five-week lows around 0.8735 against the Pound. This comes as momentum for the Pound slows down after a rally. However, the Euro/Pound pair is still on a downward path, with indicators showing more potential declines ahead.

Pound’s Recent Rally

The Pound’s recent rise is fueled by relief over a GBP 26 billion tax increase in the UK’s budget, revised GDP growth forecasts for 2025, and strong UK services data. The Euro/Pound pair has been trading in a bearish trend since its highs in mid-November. Technical indicators reveal that the 4-hour RSI is below 40, and the MACD is trending down below zero, suggesting moderate downward momentum. Right now, the Euro/Pound is trying to bounce back from the 61.8% Fibonacci retracement near 0.8740, but it faces resistance around 0.8750. Key resistance levels are at 0.8785 and 0.8800. Support levels include 0.8737, the October 27 low at 0.8720, and the 78.2% Fibonacci retracement near 0.8710. This week, the British Pound has performed strongly against major currencies, showing significant gains. Overall, the Euro is trying to recover but is still held back by bearish forces, with strong resistance above and crucial support below current levels.

Current Market Strategy

Given the bearish trend for EUR/GBP, the recent bounce from 0.8735 could be a good chance to enter short positions. The positive market reaction to the UK’s stable budget is a strong boost for the Pound, especially compared to the uncertainties faced in years like 2022. The upward revision of UK GDP for 2025 and the robust services data support the Pound’s strength further. The differences in economic data are becoming clearer and should inform our trading strategy. Recent figures show UK inflation at 3.1% for November 2025, putting pressure on the Bank of England, while Eurozone inflation has cooled to 2.4%. This suggests the European Central Bank might lower rates before the UK, which is a negative sign for the Euro compared to the Pound. For traders considering options, buying put options with strike prices below current support—like 0.8720 or 0.8700—could be a smart move for the upcoming weeks. This allows us to profit from a continued decline while limiting our maximum loss to the premium paid. The technical indicators, especially the RSI remaining under 40, indicate that bearish momentum is still strong. On the other hand, if you think this small bounce has limited upside, selling call options or creating a bear call spread with a ceiling near the 0.8800 resistance could work well. This strategy would take advantage of the likelihood that the pair won’t break the December highs. The ongoing downward trend makes a significant upside breakout unlikely in the near future. Reflecting on the sharp GBP sell-off during the fiscal challenges of late 2022, it’s clear how sensitive the Pound is to government policies. The current market reaction shows a strong preference for the fiscal consolidation now taking place, which is providing a solid groundwork for the Pound. This historical context indicates that the current strength of the Sterling is based on a more stable foundation. Create your live VT Markets account and start trading now.

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