EUR/GBP drops back below 0.8550 after second failed test of 200DMA

• EUR/GBP is back under 0.8550 after the pair rejected its 200DMA close to 0.8600.
• Central Bank divergence may continue to push the pair lower in the coming months.

EUR/GBP has traded with a largely negative bias this Monday, dropping from early session highs near 0.8590 to current levels below the 0.8550 mark. The pair has now on two occasions in the past two days failed to break above its 200-day moving average, which sits just below the 0.8600 level. Technicians might see this as a bearish sign, which may have exacerbated recent selling pressure. At present, EUR/GBP trades with on the day losses of around 0.2% and is still some way (about 1.0%) above its pre-BoE policy announcement levels from last week in the 0.8460s.

To quickly recap, the bank wrong-footed speculators as it opted not to go with a widely expected 15bps rate hike and sounded more dovish than expected on inflation and the prospect for rate hikes further out. But the ECB was also dovish last week, with ECB President Christine Lagarde pushing back strongly against EUR STIR market pricing for rate hikes as soon as the end of 2022. Since then, there has been further dovish commentary from the second most important ECB member, Chief Economist Philip Lane. He said over the weekend and reiterated on Monday his expectation that the current spike in inflation is set to be transitory and that over-reacting to a short-term spike would be a policy mistake.

Though the BoE’s disregard for investor expectations will have undoubtedly resulted in the build-up of some risk premia in GBP, the bank remains on course to begin the process of monetary policy normalisation well ahead of the ECB. BoE Governor Bailey was back on the wires only a few moments ago reiterating the bank’s worries about second-round inflation effects. Speculators may see the recent failures to break above the 200DMA as a sign that EUR/GBP’s near year-long downtrend has further room to run. Barring any further BoE surprises, a good medium-term central bank divergence play might be to ride EUR/GBP lower from here to annual lows around 0.8400.

Elsewhere, Brexit remains in the headlines and the UK looks set to trigger Article 16, which will inflame tensions with the EU and risks spilling into a trade war. As Brexit did back in the day, this presents upside risks to EUR/GBP. Otherwise, the only notable Eurozone and UK events this week is the German November ZEW survey and a speech from ECB President Christine Lagarde on Tuesday and the preliminary estimate of UK GDP on Thursday.