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Where next for the ill-fated EUR/GBP?

The first half of 2014 hasn’t been great for euro bulls. After trading in a tight range between .8350 and .8180 in Q1, the currency pair has been on the wane: bar one short lived attempt at breaking through .8400. At the end of April, the pair finally found support at the .8200 level which held for two weeks before being ultimately broken.

Since then the decline has continued and only found support around the .8000 level. After the ECB press conference yesterday, the euro lost further ground and is now trading below .7950 strongly moving to the .7900 mark.

If this level is broken significantly then the floodgates open to the 2012 lows at 77.50.

EUGBP Technical analysis July 2014 euro pound sterling foreign exchange chart for currency trading

EUR/GBP performance since May 2012. See live prices at:  https://www.ig.com/uk/ig-forex/eur-gbp

To give us an outlook for this pair, it is useful to look at the recent developments affecting each currency. The European Central Bank (ECB) and Mario Draghi have been voicing concern about a strong euro for some time. These comments may have been more related to EUR/USD, but nevertheless, the effect of weakening the single currency has been felt across the board. While EUR/USD almost broke through 1.40, it has subsequently lost 500 points and only found support at 1.35 before recovering to current levels of above 1.3650.

On the other hand, the pound is making strides all round. It has just hit a fresh six year high on cable. With the pound making further gains across other pairs and the euro vulnerable, it leaves the question: when EUR/GBP will catch up?

It seems as if the ECB has weakened the single currency in the meantime by introducing negative interest rates and long term refinancing operations, with the intention of improving lending to companies. In the UK, the Bank of England (BoE) has also acted – by imposing restrictions on mortgage borrowing. The central banks in the EU and UK are therefore pulling in the opposite direction. The BoE is using measures to indirectly strengthen their currency while the ECB is trying to weaken the euro.

This has led to a decline of the currency pair of more than 400 points from the yearly high in March.

It is to be seen whether the improving UK economy can sustain momentum and continue to thrive. Once clarity is gained on the next moves of the ECB we could well see a change in the current trend.

By Tarik Chebib, Sales Trader at IG.

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