The Euro has stabilized near 0.8800 against the British Pound after bouncing back from last week’s low of 0.8670. This stability is due to European Central Bank (ECB) officials stating they won’t cut rates anytime soon, giving the Euro a boost. Meanwhile, issues surrounding the UK’s public finances continue to negatively impact the Pound. The Euro has gained for four consecutive days against a weaker Pound, hovering around the 0.8800 level with a 0.8% increase for the week. Support from the Federal Reserve ahead of the Eurozone’s HICP report helps strengthen the Euro, while ongoing concerns over UK public finances linger.

ECB Rate Decision

On Thursday, the European Central Bank kept interest rates steady and ruled out any immediate rate cuts. ECB officials echoed President Lagarde’s optimism about the economy, indicating they were not planning to adjust rates anytime soon. Revised forecasts show that the UK’s productivity growth may decrease by 0.3% over the next five years, which could create a GBP 20 billion gap in public finances. This issue, along with moderate inflation reported in September, raises expectations for another rate cut by the Bank of England soon. Technical analysis indicates a small triangle pattern near 0.8800, suggesting the Euro may continue to appreciate. The triangle’s upper boundary, around 0.8810, serves as resistance, with a potential target of 0.8840. If the triangle’s lower boundary at 0.8790 breaks, support could be found around 0.8775. The Euro is solidifying its strength against the Pound, staying strong around the 0.8800 mark. This strength stems from a clear difference in central bank policies: the ECB is not looking to cut rates, while the Pound struggles amid concerns about the UK’s finances.

Eurozone and UK Economic Indicators

This perspective was strengthened by this morning’s flash Eurozone HICP data, which surpassed expectations at 2.8% year-over-year. Conversely, the UK’s latest retail sales figures showed an unexpected contraction, raising concerns about the domestic economy. This difference makes holding a long Euro and short Pound position increasingly appealing. Given this situation, positioning for a continued rise in EUR/GBP might be wise in the coming weeks. Purchasing call options with a strike price around 0.8850 could be a good strategy to capitalize on the potential upward movement towards the April 2023 highs near 0.8875. The current triangle pattern suggests the pair is gathering momentum for the next upward move. For those willing to take on more risk, selling out-of-the-money put options below the current consolidation level could be a smart move to earn premium. However, it’s essential to monitor the triangle’s support at 0.8790 closely. A drop below this point might indicate a false breakout and lead to deeper support testing around 0.8745. The market now expects over a 70% chance of a Bank of England rate cut before the year ends, a significant shift after the recent downgrade by the OBR. This expectation is likely to suppress any Pound rallies leading up to December’s meeting. Any further weak UK data will likely reinforce these expectations and support the EUR/GBP uptrend. Create your live VT Markets account and start trading now.

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