EURGBP looks set for a move towards the top of the decade-long range

The EURGBP pair has been rising steadily in the past few weeks. The main reason is that the divergence between the ECB and the BoE is becoming more apparent to the market, but there are also long-term fundamental forces at play.

The ECB is now near the end of its easing cycle, while the BoE might still have quite some room to the downside if we continue to get weak UK data. In fact, this week alone, we saw two big pushes to the upside following the weak UK labour market report and the disappointing UK GDP data today.

Even if the BoE is forced to hike rates at some point, they will just plunge the economy into a recession, so that would be positive for the euro as well. On the long-term fundamentals side, the EU is now experiencing some key changes ranging from increased fiscal spending to cutting “red tape” (reducing bureaucratic burdens and simplifying regulations).

Moreover, the EU is now embracing AI which is going to boost investment and total factor productivity. All in all, Europe looks like a good place where to invest in the next few years.

On the monthly chart, we can see that the pair has been stuck in a range since 2016 when the Brexit referundum sinked the GBP across the board. We’ve recently bounced from the bottom of this range and considering the fundamentals, a move towards the top of the range looks very compelling.

On the weekly chart, we can see that that the price broke above a two-year-long downward trendline in April. This could be a signal of a change in trend. The price then pulled back to retest the trendline and continued higher. Technically, a move into the 0.89 handle at very least has high probabilities.

Drilling down to the 4 hour chart, we can see that we have a nice support zone around the 0.8450 level where we can also find an upward trendline for confluence. If we get a pullback into this support, we can expect the buyers to step in with a defined risk below the trendline to position for a rally into the 0.89 handle first, and eventually target the 0.92 handle next. The sellers, on the other hand, will look for a break lower to invalidate the bullish setup and position for a drop back into the 0.8360 low.

Finally on the 1 hour chart, we can see that we have a minor upward trendline defining the bullish momentum on this timeframe. From a risk management perspective, the buyers will have a better risk to reward setup around the trendline to position for further upside, while the sellers will look for a break lower to target a deeper pullback into the 0.8450 support zone next.

This article was written by Giuseppe Dellamotta at www.forexlive.com.