EUR/GBP stumbles below 0.8800 on traders expecting a less hawkish ECB

• EUR/GBP extends its losses amidst fear of further contagion in the financial markets.
• Sentiment shifting sour punishes the Euro ahead of the European Central Bank interest rate decision.
• EUR/GBP Price Analysis: To extend its downtrend in the near term.

EUR/GBP dropped sharply from around two-day highs of 0.8843 as the UK Finance minister Jeremy Hunt unveiled the new budget that would get Britain out of stagnation. Therefore, the Pound Sterling (GBP) appreciates, even though an upcoming European Central Bank (ECB) interest rate decision is approaching. At the time of writing, the EUR/GBP trades at 0.8735, down by 0.93%.

EUR/GBP drops on expectations of a lower ECB rate hike

Market sentiment remains negative. The failure of some banks in the United States (US) has spread around the globe, with Credit Suisse (CS) sinking 13% after one of its top holders ruled out investing more. That has triggered the alarms around Europe, with traders expecting the European Central Bank (ECB) would hike rates by just 25 bps, as World Interest Rates Probabilities (WIRP) hinted.

In Eurozone (EU) data, Industrial Production recovered in January, as shown by official data on Wednesday. The report highlighted an improvement in manufacturing. EU’s Industrial Output rose 0.7% MoM vs. 0.4% estimated and exceeded the previous print of -1.3%. Annually based, exceeded forecasts of 0.2%, jumped 0.9%.

In the UK, the latest employment report was solid, with the economy adding more people to the workforce and wages cooled. That released some pressure on the Bank of England (BoE) to continue to increase rates amidst an ongoing economic deceleration.

However, the spotlight of the day turned to UK’s budget. The Chancellor of the Exchequer, Jeremy Hunt, announced a plan to increase the pace of growth in the UK, which includes childcare and tax reforms.

Jeremy Hunt has announced a plan to extend help for households struggling with high energy bills and freeze a tax on gasoline1. The plan will cancel the planned £500 hike in average energy bills, which was due to come into force next month, in a move that would see bills for the average household staying at around £1,138 a year

What to watch?

The UK economic docket is absent. On the Eurozone front, the European Central Bank (ECB) will reveal its monetary policy decision, followed by President Christine Lagarde’s press conference on Thursday.

EUR/GBP Technical analysis

The EUR/GBP retraced after peaking at around 0.8925 last week. Additionally, the cross fell below the 20, 50, and 100-day Exponential Moving Averages (EMAs), exacerbating a fall to test the 200-day EMA at 0.8701. However, the EUR/GBP fell shy of reaching the latter, though it tested the YTD lows at 0.8718. With oscillators turning negative, a bearish continuation of the EUR/GBP is the path of least resistance.

Hence, the EUR/GBP first support would be 0.8718, followed by the 200-day EMA at 0.8701. Once those levels are cleared, the pair would be headed toward the December 13 low at 0.8558.