Time To Sell The EUR/GBP Rip?

The single currency has gathered upside traction this Thursday ahead of the all important European Central Bank (ECB) rate decision.

The ECB is widely expected to announce a "lower for longer QE taper" today. As discussed here, the markets have priced-in taper in the second quarter of this year.

So what's driving the EUR higher ahead of the ECB? The markets could be pricing in a hawkish scenario (1,2) as detailed by Kathy Lien from BK Asset Management.  

• Scenario #1 (Most Likely) - Cut monthly bond buys by 30B and commit to buying bonds to September 2018.  >> Depends on Guidance
• Scenario #2 (Likely) - Cut monthly bond buys by 30B and commit to buying bonds to June 2018.  >> Mildly Positive EURUSD
• Scenario #3 (Possible) - Cut monthly bond buys by 20B and commit to buying bonds to June 2018.  >> Negative EURUSD
• Scenario #4 (Unlikely) - Cut monthly bond buys by 40B and commit to buying bonds to Sept 2018.  >> Positive EURUSD

Scenario 4 is unlikely as the ECB would not want to rock the boat by unwinding stimulus at a faster pace. Furthermore, there is a risk that Italian bond markets may react negatively to an aggressive QE taper or changes in interest rates.

Read -  ECB Meeting: Taper priced in? EUR could drop if Italian yields spike

EUR may gain if the outcome matches scenario 1/2/4, however, a bullish trend reversal is unlikely in the EUR/GBP. The monthly chart below shows bearish price RSI divergence, which is a topping pattern. 

Monthly chart

• Only a move above 0.9226 (last month's high) would revive the bull run from the July 2015 low of 0.6931.
• Only a super-hawkish ECB could yield such a sharp move higher, i.e. only under scenario 4 a move above 0.6931 is likely.

View

The upticks are likely to be short-lived. The daily below shows potential for a drop to 0.7852 (200-day MA).

Daily chart

Observations

• Repeated failure to retake the rising trend line
• The 50-day MA and the 100-day MA have topped out
• Lower highs established

Only a break above 0.9226 would abort the bearish view on the monthly chart (such a move is likely only under scenario 4).