EUR / GBP falls back from 0.8500, evaluating a test of the DMA of 21

• The EUR / GBP has retraced below the 0.8500 level and is considering a test of its DMA of 21 at 0.8465.
• The main driver of the crossover this week will be Thursday’s key Bank of England meeting.

The EUR/GBP It has fallen back below the 0.8500 level on Wednesday after flirting with the key resistance area in recent days. The catalyst for the move lower from above 0.8500 to current levels below 0.8480 is unclear; IHS Markit’s latest UK Services PMI survey for October was released this morning and was revised up from the preliminary estimate released last month and some have suggested this is helping the British pound this morning. Comments from ECB members this morning have also been rather subdued, with members rejecting the idea of ​​rate hikes in 2022, in stark contrast to expectations of rate hikes from the Bank of England on Thursday this week.

Whatever the reason for the move down, the EUR / GBP is now testing support in the form of the October 28 high at 0.8475 before a possible test of its 21-day moving average at 0.8465. The main driver of the pair for the remainder of the week will of course be the aforementioned BoE meeting on Thursday, with markets unsure whether the bank will raise rates or not and what the split of votes on rate hikes will be. rates, the higher than usual degree of uncertainty about this meeting means that the forex market reaction could be oscillating and go both ways.

The ECB rejects aggressive market prices

Several ECB policy makers have made public statements so far on Wednesday. The most important comments came from the President of the ECB, Christine Lagarde; after it was criticized last week for not rejecting money market prices for rate hikes in 2022 as strongly as markets expected it to do, resulting in volatile conditions in the currency and bond markets in the days since that Lagarde was a little more explicit on Wednesday. The conditions that the ECB wants to see are unlikely to be met before interest rates start to rise (i.e. inflation is above the 2.0% target and is expected to remain there for the duration of the horizon forecasting bank) Lagarde said, adding that the eurozone economy would continue to need support even after the pandemic has faded next year. In addition, he said that the medium-term inflation outlook remains subdued.

Three-month Euribor futures for December 2022, which tumbled to 100,155 last Friday (implying that markets were pricing up to 50bp of ECB rate hikes by the end of 2022), are now back. to trade around 100.30, which implies a rise of more than 30 bp by the end of next year. If the ECB’s policy makers are correct, this could rebound to the 100.50 area (which would imply no hikes). This would likely weigh on the euro, although for now currency markets are focused on the next Fed meeting.

Brexit, fishing war

Brexit remains in the headlines; UK Prime Minister Boris Johnson was recently making statements on how the UK wants “substantial” changes to the existing Northern Ireland Protocol. Political analysts hope that the UK will soon activate Article 16, which allows the UK to take unilateral action on the deal if it considers that the implementation of the protocol has serious negative consequences. EU leaders are warning the UK not to take that step as it opens the prospect of more tense negotiations on trade and legal issues that may escalate, as well as threatening the ongoing UK-French fisheries dispute. The tone of the news on this latest dispute has improved in recent days, however, after the French chose not to impose retaliatory measures on access to overfishing in the UK and French government ministers recently praised the approach. constructive from the UK government in discussions on fisheries.

Technical levels