EUR/GBP – Could we finally see a breakout?

Or will the long term channel hold?

The euro has been grinding lower against the pound for more than a year now, with much of 2021 spent within a shallow descending channel.

But with the two central banks likely to see some divergence in monetary policy over the next 12-18 months, could we finally see the pair break out of this long-standing trend?

The BoE bottled the rate hike at its November meeting, opting instead to wait for the furlough data before making its decision. Not bad logic in itself but when coupled with the communication in the run-up to the meeting, it’s confusing, to say the least.

While most central banks appear to be on the same page that the huge inflation overshoots are transitory, the responses to this are looking quite different which is what could be the catalyst for a breakout in this pair.

Already we’re seeing it trading at the bottom of the channel as more rate hikes are priced in for the UK. The ECB has pushed back and inflation data at the turn of the year may allow it plenty of flexibility to do so.

The pair has once again rebounded off the lower end of the channel after once again losing momentum on approach to it, but can it generate much upside from here? If not, will it break out and accelerate lower or continue to grind along the lower edge of the channel?

It is already running into some resistance around the late October lows which suggests we may not have to wait long to see. It could take a big push, perhaps some hawkish warnings from BoE policymakers as a catalyst, but should it break, the pair could spring to life for the first time in quite a while.

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