EUR/GBP price prediction: is the bears’ pain over?

By: Mircea Vasiu
Mircea Vasiu
Mircea Vasiu has been writing about the stock market and currency trading for a decade. Mircea leverages his knowledge… read more.
on May 26, 2022
  • EUR/GBP bounced from lows
  • ECB plans to end negative rates
  • An inversed head and shoulders pattern points to more upside

Ever since Brexit happened, the British pound gained against the common currency, the euro. Despite many analysts calling for the pound’s decline, it gained ground in a relentless bearish trend.

The downtrend was so strong that even in 2022, some analysts believe that the EUR/GBP exchange rate will still hover around 0.84 in March 2023 – about 10 months from now.

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Currently, EUR/GBP trades at 0.85, bouncing from its lows and looking constructive from fundamental and technical perspectives. So, where will the exchange rate go next?

Here is a price prediction considering both the technical and fundamental aspects.

The two central banks’ policies are set to diverge

Let’s start with the fundamental perspective. A currency pair moves based on the monetary policy differences between the two central banks.

In this case, the Bank of England was one of the first major central banks in the world that decided to increase the interest rate in the aftermath of the COVID-19 induced recession. Moreover, it did so not once but multiple times.

At the same time, the European Central Bank did nothing. It couldn’t do so, as a war started in Eastern Europe (Russia invaded Ukraine) in February.

In order to shelter European economies from the war’s economic impact, the European Central Bank preferred a wait-and-see stance. However, inflation is running way higher than the central bank’s target, and one of the causes is just the war.

As such, the central bank recently announced that it plans to end negative rates by September. Considering that the deposit facility rate is at negative 50bp, it means that a couple of rate hikes are on the table during the summer.

Yet, the Bank of England is now in a wait-and-see mode. Therefore, the fundamentals favor a move higher in the EUR/GBP exchange rate over the summer.

An inverse head and shoulders shows EUR/GBP struggling to overcome resistance

From a technical perspective, the market may have bottomed with the move to 0.82. It was quickly retraced, suggesting the presence of an inverse head and shoulders pattern.

A close above 0.86 should put the 0.90 area in focus. That is where the pattern’s measured move points to, and the move also implies that the lower highs series would be broken, thus ending the bearish bias.

All in all, EUR/GBP looks bullish here. Both technical and fundamental aspects favor more strength in the months ahead.

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