The EUR/GBP is closing in on the psychological support level of 0.70, as we had expected the start of the month. Then, we were waiting for the European Central Bank meeting to be out of the way and we recommended that some caution should be taken going into that meeting. But we also said that “ultimately, however, the growing monetary policy divergence between the Eurozone and the other major economies, such as Britain the US, means the euro will probably fall further in the medium to long terms.” And that is exactly what has happened, although the speed of the drop has even surprised us. The EUR/USD (see figure 2) meanwhile is now fast approaching parity which is where many, including ourselves, believe the single currency may find some significant support. The GBP/USD (figure 3) on the other hand is hovering around the 1.50 handle once again after the recent recovery ran out of steam. Thus, if the Cable breaks decisively below 1.50 then the EUR/GBP may find some support around the 0.70 handle. That said, the GBP has been absorbing the dollar’s strength relatively well of late compared to most other currencies in G10, suggesting that the GBP/USD may even be in the process of forming a bottom. If this scenario plays out then the EUR/GBP could fall a lot further.
Indeed, the GBP has even managed to absorb today’s weaker-than-expected UK data as manufacturing production fell 0.5% in January after a 0.1% increase the month before, while industrial production slipped 0.1% on the month. Although the GBP/USD edged lower this morning, this was probably because of the US dollar’s growing strength, for most GBP crosses remained in the black. The EUR/GBP could not halt its slide and as mentioned it is now just shy of the 0.70 handle. As the RSI is now at an extremely oversold level, a small short-covering bounce from around this psychological support level should not come as a surprise. The next major level of support for the EUR/GBP is at 0.6550 which roughly correspond with the lows of 2004 and 2007, and the 78.6% Fibonacci retracement of the upswing from the 2000 low.