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The EURGBP pair has kept under pressure after breaking under the 0.8500 level last month, as the difference between the Bank of England and European Central Bank policymakers drives the pair lower.
Next week the Bank of England is widely expected to raise interest rates, meaning they are miles ahead of the ECB. With the recent cycle of ultra-low rates, many traders have forgotten that rates are a primary driver of the FX markets.
In an era of ultra-low rates it is easy to forget that previously trading rate differentials was a primary tool of currency traders. In fact, many banks and trading desks have interest rate specific trading strategies.
With that said, the expected BoE hike is driving the EURGBP pair, and indeed the sentiment towards the pair. Strangely, retail traders are in a state of disbelief towards the coming rate hike and remain bullish towards the EURGBP cross pair.
The ActivTrader platform shows that bullish sentiment is at extreme levels, with some 87 percent of traders still expecting more upside in the EURGBP pair. One-way sentiment skews are rarely correct, so the current bullish is slightly worrying.
Additionally, the forward swaps and future markets are pricing in a much higher sterling exchange rate, so we could see the British pound becoming increasingly bid against other crosses.
We should also consider the EURUSD. The euro currency is lagging against the greenback due to the clear divergence in central bank policy. This may also suggest the single currency is out of favour with currency traders.
Overall, we should expect more EURGBP weakness, and potential this pair to sink to a new yearly low, and potential multi-year low, close to the 0.8300 to 0.8200 area over the coming weeks.
EURGBP Short-term Technical Analysis
The four-hour time frame shows that the EURGBP pair is technically bearish over the short-term with the price trading well below its key 200-period moving average, around the 0.8500 area.
Lower time frame analysis currently shows the EURGBP pair has staged a bearish breakout from a large triangle. This has prompted huge losses, with the 0.8380 level the near-term objective of the pattern breakout.
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EURGBP Medium-term Technical Analysis
The daily time frame shows that the EURGBP pair is starting to settle into a much lower trading range and could be about to move into a significantly lower price range.
I can also see a large broadening expanding wedge patter, which is located between the 0.9400 and 0.8000 area. These types of channel patterns are typically neutral, and signal period of volatility between either side of the wedge before a powerful breakout occurs.
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