EUR/GBP bears dominating on euro weakness, critical support under pressure

• EUR/GBP is faltering at critical support with eyes on lower levels.
• The euro has dropped to the lowest level against the greenback since May 2017.

EUR/GBP is extending its downside correction this week having suffered a lower corrective high on the 4th February within a prevailing bearish trend and is now on par with the lowest levels for the year to date. The cross is currently trading at 0.8389 and has travelled from a high of 0.8428 to a low of 0.8386, -0.44% at the time of writing. 

With the US and Chinese trade deal put to bed, for now, the market's focus this year has been on central banks and the coronavirus. However, we are seeing more weighted attention to the central banks again this week now that there appear to be prospects for the virus being contained. China announced that the number of new cases confirmed inside the country had declined for two days in a row. In additional encouraging news, a UK man who has contracted the virus has been discharged from St Tomas's hospital in the UK following two separate tests twenty-four hours apart that have given him the all-clear.

Meanwhile, the euro has recently dropped to fresh lows, the lowest levels since May 2017 at 1.0877. This too is weighing on the cross which is now testing a critical pivot point on the charts. However, sterling needs to come into its own if there is going to be much more mileage in this move – and there lies the problem for the bears. The UK's economic backdrop will be swamped with pessimism pertaining to the EUR and UK negotiations which raises the prospects of a rate cut from the Bank of England. 

The possibility of a flare-up of UK/EU tensions to keep the pond in check

The UK economy failed to grow in the fourth quarter and a material deterioration in UK activity could well force the hand of the Old Lady. The BoE's forecasts pencil in 0.2% growth in the first quarter, and 0.3% in the second, but that is a judgement which assumes there will not be a breakdown in UK and EU trade negotiations, nor heightened uncertainty for UK businesses. However, in the absence of positive trade headlines, the mere possibility of a flare-up of UK/EU tensions is likely to keep the pound in check. On the other hand, positive progress in negotiations would have the reverse effect and wipe prospects of a BoE rate cut from the table, enabling some upside relief to sterling.  

EUR/GBP levels

EUR/GBP is testing a key area of support on the third attempt of a 61.8% Fibonacci retracement level. The 16th Dec highs are located at 0.8364 which reside just above an extension to the 78.6% Fibo target. Bulls will need to get back above 0.8420 and then hold above 0.8430 to avert the immediate downside risks.