EURGBP – Drops to Two-Year low

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EURGBP, Daily

The December Eurozone Preliminary Inflation Estimates continued to record higher above the ECB’s 2% target for the sixth month, at 5% from the 4.9% seen in November, compared with forecasts of 4.7%. Energy prices once again saw an increase of 26% per year. The key Core CPI data remained at 2.6% above estimates for a slight cooling to 2.5%. The data, released on Friday, added to the already heavy EURGBP pair.

The Eurozone’s economic confidence index for December was at its lowest since May, at 115.3 from November’s 117.6, in line with consumer confidence. December dropped to a nine-month low of -8.3 and service sector sentiment in December dropped to a seven-month low of 11.2 from 18.3 seen the previous month.

EURGBP has started to decline significantly since the central bank’s policy meeting in mid-December, with the ECB planning to cut asset purchases under the PEPP program in the first quarter of 2022. It will continue its asset acquisitions under the APP program at €40 billion in Q2 and €30 billion in Q3, while the BoE side surprised the market by raising interest rates to 0.25% from 0.1%.

With the ECB and BoE divergence in policy trend, the EURGBP pair is heading for a test of the two-year low zone of 0.8280 if it can break through the previous week’s low of 0.8334, while a retracement to the low zone of 0.8280 in the short-term is necessary to stand above the 0.8370 zone first to test the next resistance at the MA50 line around 0.8450.

Will the price be able to make a new low into a two-year low test? The answer may lie in today’s Eurozone November Unemployment Rate Report, which was inline with expectations at 7.2%, slightly down from 7.3% the previous month. While the data refers to a period when Omicron hadn’t really impacted the recovery yet, survey data and more up to date German numbers for December indicate that the improvement in labor markets still continued as companies remain relatively optimistic about the medium to long term outlook. Rates remain very different across the major Eurozone countries, however, and youth unemployment rates remain unacceptably high, at 29.2% in Spain, 28.0% in Italy and 17.8% in France. Germany’s 6.4% rate is an exception and far below the Eurozone average of 15.5%, although even here there is an improving trend.

Chayut Vachirathanakit
Market Analyst – HF Educational Office – Thailand

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