EUR/GBP dips back under 0.8400 on technical selling/“dovish” Lagarde commentary, will bulls buy the dip?

• Technical selling on the break of a descending triangle and “dovish” comments from ECB’s Lagarde sent EUR/GBP back under 0.8400.
• As UK growth outlook fears mount, traders mull the prospect of tigther ECB policy, has EUR/GBP become a “buy-on-dips”?

EUR/GBP broke below a short-term descending triangle on Friday as the euro weakened on further dovish sounding rhetoric from ECB President Christine Lagarde and as pound sterling saw some relief after not as bad as feared December GDP figures. Though the pair had been consistently posting lower highs since the start of the week, support at 0.8410 had been holding firm. That support broke during the late Asia Pacific session/early European session trade, with EUR/GBP having now dipped back below the 0.8400 level to hit fresh lows since last Thursday.

The recent move lower also saw EUR/GBP break below support in the form of its 50-Day Moving Average at 0.8410. Short-term bearish speculators may now target a test of the 21DMA at 0.8370. But the outlook for a return to multi-year lows pre-last week’s hawkish ECB meeting is weakened, some strategists have said. Whilst the BoE has/is expected to continue front loading monetary tightening, analysts fear this is very much “in the price” for sterling now. While money markets are priced for as much as another 150bps of tightening this year from the bank, analysts are fretting about the weak outlook for UK growth from Q2 onwards.

“The (UK) recovery will probably lose momentum in the course of the year” analysts at Commerzbank noted. “High inflation, tax increases in April and the BoE's interest rate hikes are a burden on the economy” they continued. The British Chambers of Commerce agrees. Its head of economics Suren Thiru stated that “the UK economy is facing a materially weaker 2022 as the crippling burden of rising inflation, soaring energy bills and higher taxes on consumers and businesses dampens activity.”

While these fears may continue to dampen the appeal of the pound, ECB President Christine Lagarde’s latest more dovish-leaning remarks have failed to dampen speculation that the ECB will accelerate its QE taper and start hiking interest rates in Q4. Reuters reported on Friday that, according to trading sources and industry data, investors are “piling” into derivatives linked to a rising euro. Analysts at Citibank told Reuters that the mentality of the euro as a “funding” currency is beginning to disappear. “The ECB decision was a game-changer for the euro” they noted, adding that “while we don't expect the euro and rest of the world yield differential to shrink dramatically, it is a big change in sentiment”.

The net result might be that EUR/GBP has finally become a “buy on dips” rather than a “sell on rallies”, at least as far as longer-term swing traders are concerned. The 50% Fibonnaci retracement back from this week’s multi-week highs in the upper 0.8400s to last week’s sub-0.8300 lows at 0.8380 might well be such a level where traders are enticed to buy the pullback. The rest of Friday’s session ought to be quiet amid a thin data calendar and pre-weekend low liquidity.