The Euro is gaining strength against the Pound but may struggle to get past the 0.8720 mark. Recent political developments in France and assertive comments from ECB officials have boosted the Euro’s value. Technically, the EUR/GBP has been trading in a narrow range of 60 pips near 0.8700 over the past few weeks. If it breaks through the resistance level of 0.8720-0.8730, it could aim for the year-to-date high of 0.8750, with trendline resistance around 0.8795.

The European Central Bank and Its Policies

The European Central Bank (ECB), based in Frankfurt, controls the Eurozone’s monetary policy, targeting a 2% inflation rate. It primarily uses interest rates and sometimes applies Quantitative Easing (QE) during economic crises to maintain stability. QE involves the ECB buying assets to stimulate the economy, which usually weakens the Euro. On the other hand, Quantitative Tightening (QT) strengthens the Euro when the economy improves, allowing the ECB to cut back on bond purchases. The ECB’s actions can greatly influence currency strength. Currently, the Euro is gaining on the Pound but struggles to pass the 0.8720 mark. Political stability in France supports the Euro, while ECB officials maintain a hawkish stance on interest rates. The EUR/GBP pair remains in a choppy range around 0.8700. This morning, we received the flash Harmonised Index of Consumer Prices (HICP) for the Eurozone, which showed a rate of 2.7%, slightly above the expected 2.6%. More importantly, core inflation, which the ECB closely monitors, remains high at 3.1%. This supports the ECB’s tough stance and makes it unlikely they will cut rates soon.

UK Inflation and Market Expectations

In contrast, the UK’s inflation data released on October 15th showed the headline rate cooling to 3.0%. This difference in inflation trends suggests that the Bank of England feels less pressure to be aggressive compared to the ECB. This scenario supports the idea that the Euro will strengthen against the Pound in the weeks to come. Given the tight trading range, a breakout seems likely, and the more accessible path appears to be upward. Traders might consider buying short-term call options with a strike price just above the 0.8730 resistance level to profit from a potential move towards the year-to-date high of 0.8750. This approach limits risk while capitalizing on a possible breakout. We are closely monitoring the 0.8730 level as a key point for bullish signals. Reflecting on the significant policy shifts by central banks in 2023 and 2024, a strong break could lead to a swift upward move. However, if there’s a solid rejection at this resistance level, the price may drop back to the 0.8660 support level, creating opportunities for range traders. Create your live VT Markets account and start trading now.

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