While the most obvious risk to both currencies is the renewed focus on the Northern Ireland Protocol as the UK Foreign Secretary Liz Truss communicated the UK's response to the EU’s latest proposal which she said would actually make matters worse. The longer the situation persists with neither side looking to make any significant concessions, the risk of triggering Article 16 and the bigger threat of an ensuing trade war, rises.

However, recent comments from the Bank of France Governor Francois Villeroy stating, “a euro that is too weak would go against our price stability objective”, have stoked rate hike odds which now anticipate hikes of over 100 basis points by year-end. While the first realistic rate hike could materialize in July, markets tend to price the result ahead of time, elevating the euro.

While the euro’s rate hike odds maintain an upward trajectory, the UK has recently turned the other way as 2 members of the BoE view risks to inflation and growth as more balanced. Rates markets now see just 120 further basis points in rate hikes to year-end compared to around 200 for the Fed. Add to that the cost-of-living squeeze which got worse after Wednesday’s 9% inflation print and the first signs of a contraction last Thursday where GDP for March contracted 0.1% month on month. In contrast, ECB members have played down the probability of recession in the eurozone.

Unfortunately for the pound, the data doesn’t seem to be getting any better as retail sales data tomorrow is expected to show a sizeable 7.2% contraction for April, compared to the same time last year.

EUR/GBP Technical Analysis

The euro has started to make higher highs against the pound with the latest pullback from the high providing softer levels for EUR/GBP bulls. Over the nearer term, 0.8470 appears as the most relevant level of resistance followed by 0.8500. The average true range indicator reveals elevated levels of volatility despite appearing to have peaked, so risk management warrants closer attention. Support is at 0.8450 (provided support twice in 2021) followed by 0.8410.

EUR/GBP Daily Chart

(Click on image to enlarge)

Source: TradingView, prepared by Richard Snow

The broader outlook for a bullish EUR/GBP scenario gains credibility above 0.8595 and 0.8660 which is still a long way from current levels but underscores the potential of the larger move when considering the fundamental outlook behind both currencies.

Weekly EUR/GBP Chart

(Click on image to enlarge)

Source: TradingView, prepared by Richard Snow
 

Worrying Signs For IG Client Sentiment Analysis

IG Client sentiment is a powerful indicator in strong trending markets. The EUR/GBP pair, however, have traded all over the place and exhibits very choppy price action – reducing the effectiveness of sentiment analysis.

EUR/GBP Sentiment Overlay

Source: IG Client Sentiment, prepared by Richard Snow

• EUR/GBP: Retail trader data shows 59.26% of traders are net-long with the ratio of traders long to short at 1.45 to 1.
• We typically take a contrarian view of crowd sentiment, and the fact traders are net-long suggests EUR/GBP prices may continue to fall.
• However, the black rectangle highlights the fact that aggregated net sentiment appears to have oscillated from positive to negative – reducing the effectiveness of the indicator. Typically, IG client sentiment is most insightful when a particular market has remained net-long or net-short for an extended period of time.