EUR/GBP Analysis: Technicals Favor Short-term Rally, Eyes BOE's Forward Guidance

The sell-off in the EUR/GBP from the Oct. 20 high of 0.9022 ran out of steam at a low of 0.8733 on Wednesday. At the time of writing, the currency pair is trading at 0.8778 levels.

The Bank of England (BOE) is expected to hike rates today for the first time in more than a decade. The move appears to have been priced in by the markets.

UK 2-year yield

The 2-year gilt yield, which is more sensitive to short-term rate hike bets, rallied from 0.14 percent to 0.482 percent in September. Since Sept. 18, the yield has moved in a sideways channel-like formation.
The spike in September indicates a 25 basis points (bps) rate hike has been priced in.

BoE: 80% priced for a 25bps rate hike today – Rabobank

BOE - Focus on forward guidance

Kathy Lien from BK Asset Management writes, "BoE announcement will be particularly difficult to trade because aside from hike or no hike, the number of people who support the move (or lack thereof), their updated economic forecasts and forward guidance will all play a role in how the currency trades."

Scenario I - BOE strongly suggests the next rate hike would happen in a few months

The 2-year yield could see a bullish flag breakout and yield GBP rally. EUR/GBP could resume the sell-off towards 0.8682 (61.8% Fib R of Apr/Sep rally).

Scenario II - BOE forward guidance indicates the bank is no hurry to hike rates further

The 2-yr yield could drop. EUR/GBP could revisit 0.89 handle. Bullish doji reversal would be confirmed.

EUR/GBP Technicals

Daily chart

The above chart shows-

Head and Shoulders pattern with neckline support of 0.8746
Wednesday's candle was a long-legged doji

The above chart shows-

Bearish price RSI divergence
Pair staging a rebound from the 23.6% Fib support of 0.8746
10-DMA still sloping upwards

View

The technicals seem to favor of a corrective rally to 0.89 handle in the short-run as suggested by the doji candle at the head and shoulders neckline support and rebound from 0.8746 (confluence of neckline and the 23.6% Fib at 0.8746).
On a larger scheme of things, the outlook remains bearish as indicated by the bearish price RSI divergence on the monthly chart. Only a move above 0.9306 would revive the bull run from the 2015 low of 0.6931.
On the downside, a break below 0.8733 (previous day's low) would signal continuation of the sell-off towards 0.8682 - 0.8650 levels.

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