Market Analysis: EUR/GBP Extends Rally but Faces Key Resistance

The EUR/GBP pair has sustained positive momentum for a fifth consecutive session, reaching a 10-week high as it rallies through previous resistance levels. The pair now sits just below 0.8425, where the 200-day Simple Moving Average (SMA) acts as a key barrier. This level of bullish momentum hasn’t been seen since last August, when EUR/GBP surged by over 2% to 0.86. However, with the Relative Strength Index (RSI) nearing overbought territory, the rally may face exhaustion, limiting further upside in the near term. Early signs of weakness are already emerging, with the pair ending Monday’s session well below its highs and failing to break past this level on Tuesday. Combined with the 200-day SMA, this creates an appealing zone for sellers to capitalize on the weakening momentum.

EUR/GBP daily chart

Past performance is not a reliable indicator of future results.

Factors Driving the Rally

The current rally is primarily fuelled by pound weakness, as the euro has struggled to gain meaningful traction on the global stage. The bearish sentiment surrounding UK assets has made EUR/GBP highly sensitive to developments in the UK economy.

Upcoming UK economic data will be pivotal. Investors are closely monitoring the Consumer Price Index (CPI) and GDP figures due on Wednesday and Thursday, respectively. Rising concerns about stagflation—marked by stagnant growth and persistent inflation—have weighed heavily on the pound. The rapid increase in borrowing costs, driven by both global pressures and a worsening fiscal outlook in the UK, has amplified economic uncertainty, pushing the pound to its lowest level in a year against the dominant US dollar.

UK Economic Outlook

Recent data points paint a grim picture. The UK economy showed zero growth in Q3 2024, while inflation remains stubbornly above 2.5%, with an upward trend in recent months. Typically, the Bank of England (BoE) would lower interest rates to stimulate growth in such scenarios. However, the risk of reigniting inflationary pressures limits its ability to act. Meanwhile, rising yields have increased borrowing costs for businesses and consumers, further dampening investor sentiment.

Key Scenarios to Watch

1. Strong CPI Data
   A higher-than-expected CPI reading could provide temporary support for the pound by reducing the likelihood of a BoE rate cut next month. However, this would exacerbate the UK’s economic challenges, likely limiting any sustained pound recovery.

2. Weak CPI and Modest GDP Growth
   A softer CPI reading, coupled with modest GDP growth, could ease concerns about the UK’s economic trajectory. This scenario might attract buyers to capitalize on the pound’s recent weakness and increase the odds of a rate cut by the BoE. Such a development would support a more sustainable recovery for GBP.

Technical Perspective

From a technical standpoint, the rally’s momentum is showing signs of fatigue. The RSI nearing overbought territory suggests potential for a near-term correction. Additionally, the 200-day SMA represents a significant resistance level, with recent daily candlestick patterns reflecting selling pressure at higher levels. While a short-term pullback appears likely, the broader trend remains tied to the evolving macroeconomic landscape.