EUR/GBP falls below 0.8800 on expectations of a less aggressive ECB

• EUR/GBP extends losses amid fears of bank contagion in financial markets.
• The change in sentiment punishes the euro ahead of the European Central Bank’s interest rate decision.
• EUR/GBP Price Analysis: Extending its short-term downtrend.

The crossing of the EUR/GBP fell sharply from two-day highs of 0.8843 as UK Chancellor of Finance Jeremy Hunt unveiled the new budget that will lift Britain out of stagnation. Therefore, the British pound (GBP) is appreciating, despite an upcoming decision from the European Central Bank (ECB) on interest rates. At the time of writing, the EUR/GBP is trading at 0.8735, down 0.93%.

EUR/GBP falls on expectations of a smaller ECB rate hike

Market sentiment remains negative. The bankruptcy of some banks in the United States (US) has spread throughout the world, and Credit Suisse (CS) has plunged 13% after one of its main holders ruled out investing more. This has set off alarm bells in Europe, where traders expected the European Central Bank (ECB) to raise rates by just 25 basis points, as suggested by the World Interest Rate Probabilities (WIRP).

As for the Eurozone (EU) data, Industrial Production recovered in January, official data showed on Wednesday. The report highlighted an improvement in manufacturing. EU industrial production rose 0.7%m/m vs. 0.4% estimate and topped the previous figure of -1.3%. In annual terms, it beat forecasts of 0.2% and rose 0.9%.

In the UK, the latest jobs report was strong: the economy added more people to the workforce and wages cooled. This has released some pressure on the Bank of England (BoE) to continue raising rates amid an ongoing economic slowdown.

However, the focus of the day was on the UK 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 aid to households struggling with high energy bills and freeze a tax on gasoline. The plan will cancel a planned £500 rise in the average energy bill, which was due to come into effect next month, bringing the average household bill to around £1,138 a year.

What to see?

The UK economic agenda is absent. In the Eurozone, the European Central Bank (ECB) will announce its monetary policy decision, followed by a press conference by its president, Christine Lagarde, on Thursday.

EUR/GBP Technical Analysis

The EUR/GBP pair pulled back after reaching a high around 0.8925 last week. Furthermore, the cross fell below the 20, 50, and 100 day EMAs, furthering the decline to test the 200 day EMA at 0.8701. However, the EUR/GBP pair fell short of the latter, although it did test the last twelve month lows at 0.8718. With oscillators in the negative, the bearish continuation of the EUR/GBP is the path of least resistance.

Therefore, the first support for the EUR/GBP would be 0.8718, followed by the 200 day EMA at 0.8701. Once these levels are broken, the pair would head towards the December 13 low at 0.8558.