Both central banks will probably have to do whatever they can to fight inflation, but both are going to have very weak economies.
- The EUR/GBP has fallen hard during the trading session on Wednesday, reaching down to the 200-Day EMA, right at the 0.86 GBP level.
- At this point, we are testing a major support level over the last couple of months, but you could make an argument for some type of demented head and shoulders pattern getting ready to break down.
- In that scenario, we could see a move down to the 0.84 GBP level without too much imagination.
Underneath there, we have the 0.83 GBP level which has been more important support over the longer term. We have been bouncing around in a 900 PIP range for what seemed like a lifetime, now that we have gotten away from the idea of a horrible British budget, the British pound has recovered quite nicely after forming a massive shooting star that pierced the 0.92 level. On the other hand, we have the European Union, which is a train wreck just waiting to happen, and that’s impressive to say considering that I’m comparing it to the United Kingdom.
Both Currencies Are Going to Struggle
Both central banks will probably have to do whatever they can to fight inflation, but both are going to have very weak economies. It is because of this that I do not anticipate that the market breaks out of this range anytime soon, but if it were to break down below the 0.83 level, it is more likely than not we would be looking at the 0.80 GBP level quicker than most people imagine. By its very nature, this pair does tend to be very choppy, as these 2 economies do a lot of business with each other and quite frankly face a lot of the same problems. Both are going to struggle with the idea of energy through the winter, and the Bank of England has already said that they are expecting a two-year recession. In other words, this is going to be a fight between 2 struggling economies, but both central banks must fight inflation so rising interest rates will probably continue to propel both currencies over the course of the long term.
If we do bounce from here, then I anticipate that the 0.88 GBP level will be difficult to break above, and therefore we may just have short-term choppy consolidation as we try to figure out where to go next.