EUR/GBP price forecast after better than expected UK employment data

on May 17, 2022
  • UK employment data bullish for sterling
  • EUR/GBP tests critical support
  • The two central banks have divergent policies

EUR/GBP reacted the most to the better than expected UK employment data. Earlier today, the Claimant Count Change and the Unemployment Rate declined more than the market expected, triggering a rally for the British pound.

As such, the EUR/GBP cross rate fell aggressively. The sterling’s rally, understandable from an economic data perspective, is also fueled by the fact that the pound has been highly oversold lately.

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Take the GBP/USD, for instance. It traded close to 1.20, down more than 1,500 pips points in 2022 alone. Sure enough, the US dollar’s strength triggered the move, but the sterling’s weakness did help too.

Today’s positive employment data came when the Bank of England warned about rising inflation and that it is not much it can do to stop it. In an interview with The Daily Telegraph, the Bank of England’s Governor warned about food inflation as shortages triggered by the war in Ukraine will lead to an uncontrolled move higher in inflation.

EUR/GBP rejected at strong resistance

EUR/GBP traded above 0.86 before being sold aggressively. It failed at 0.86, an area that acted as strong resistance in the past, and now threatens to move test 0.83 again – a critical support area.

Since Brexit, the EUR/GBP exchange rate has dropped continuously. It found a bottom at the 0.83 level in 2022 after dropping by more than one thousand pips points, as investors sold the common currency after the United Kingdom had left the European Union.

Moreover, when the conflict in Ukraine started, the common currency took another leg lower – and so did the EUR/GBP exchange rate. Finally, the two central banks, the Bank of England and the European Central Bank, have divergent monetary policies.

On the one hand, the Bank of England has already hiked the interest rate, and it talks hawkish. But on the other hand, the European Central Bank is still doing quantitative easing and plans to lift the rates during the summer for the first time in years.

All in all, the EUR/GBP pair looks poised to test the lows again. 0.8300 is a critical support area, and a daily close below should trigger more weakness.

While the technical picture points to a bearish development, so does that fundamental one. Because there is a gap between the two central banks’ monetary policies, the bias for the EUR/GBP exchange rate remains bearish.

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