Short-Term Forex Technical Outlook: EUR/GBP (Update)

The European Central Bank is widely expected to lower the benchmark interest rate by another 25bp to a record-low of 1.00% later this week, and as the Governing Council attempts to put a floor on the overnight lending rate, long-term expectations for higher borrowing costs could boost the appeal of the single-currency however, as policymakers fail to meet on common ground, the lack of decisive action could weigh on the exchange rate as the region faces its worst economic downturn in over half a century.
Currency Pair: EUR/GBPChart: 60 Min ChartsShort-Term Bias: Flat
Analysis Update
The EUR/GBP pushed higher during the overnight, but failed to break above the 120 SMA, and the pair may continue to hold a tight range over the remainder of the session as investors weigh the outlook for future policy. At the same time, as market participants expect the ECB to lower borrowing costs further this month and anticipate the Governing Council to adopt unconventional measures to stimulate the ailing economy, dovish commentary following the rate decision is likely to weigh on the exchange rate as the region faces its worst economic downturn in over half a century, and we may see the euro-pound retrace the advance from December if ECB President Trichet fails to put a floor on the interest rate. As a result, we are likely to see increased volatility for the pair on Thursday as the ECB and the BoE are scheduled to hold their policy meeting, and commentaries following the decisions are likely to move the markets as the Euro-Zone and the U.K. face their worst economic downturn since World War II. Nevertheless, the fundamental event risks scheduled for the next 24 hours may call for a change in our outlook.

Analysis
The European Central Bank is widely expected to lower the benchmark interest rate by another 25bp to a record-low of 1.00% later this week, and as the Governing Council attempts to put a floor on the overnight lending rate, long-term expectations for higher borrowing costs could boost the appeal of the single-currency however, as policymakers fail to meet on common ground, the lack of decisive action could weigh on the exchange rate as the region faces its worst economic downturn in over half a century. After reaching a low of 0.8233 on 11/28, the EUR/GBP surged to a high of 0.9805 in December as the Bank of England slashed borrowing costs at a rapid pace in an effort to soften the landing of the economy, and as BoE Governor Mervyn King is expected to hold the interest rate at the record-low, the lack of momentum to push back above 0.9480-90 (21.4% Fib) paired with expectations for further easing by the ECB should continue to lead the pair to retrace the advance from November. Over the next few hours of trading, we are likely to see the euro-pound attempt to push higher to retrace to sell-off from the previous week, and may work its way towards 0.9000 to fill-in the gap from the 120 SMA however, the pair is likely to face increased selling pressures over the week, and may break below its current range as the ECB is anticipated to adopt unconventional measures to shore up the economy as the interest falls close to zero. Be sure to check out other Technical Reports from DailyFX for additional information on the major currency pairs.