Inverted H&S forms amid ECB and BoE divergence

The EUR/GBP exchange rate pulled back slightly as forex traders assessed the outcomes of the upcoming European Central Bank (ECB) and Bank of England (BOE) actions. It retreated to a low of 0.8888, which was a few points below this month’s high of 0.8923.

BoE vs ECB decisions

The BoE and ECB will deliver their monetary policy decisions on March 23 and March 16, respectively. Economists are now preparing for what to expect when the two central banks meet. 

In a statement this week, BoE’s Catherine Mann warned that the pound could continue falling in the coming months. She cited the fact that the hawkish tone by the ECB and Fed were already priced in. 

The BoE has sounded a bit dovish in the past few months. As such, there is a likelihood that it will deliver a tiny 0.25% rate hike in this meeting. In a statement, an analyst at UBS said:

“With the BOE seemingly at the more dovish end of the central bank spectrum, sterling might continue to struggle against the euro and the dollar in the short term.”

On the other hand, the European Central Bank is expected to continue hiking rates in a more aggressive tone. In a statement this week, the Austrian central bank governor recommended that the bank should deliver two more 0.50% rate hikes. Analysts at ING expect that the bank will hike by 0.50% followed by two more 0.25% hikes in May and June. They wrote:

“Our base-case scenario is for the ECB to hike rates by 25bp in May and June and then pause its hiking cycle.”

Therefore, with the ECB and BoE taking divergent paths, there is a possibility that the euro will do better than the pound.

EUR/GBP forecast

EUR/GBP chart by TradingView

The 4H chart shows that the EUR to GBP price faced a strong resistance level at 0.8923. This was also the highest point on February 17. The bullish trend is being supported by the 25-day and 50-day moving averages. It has also formed an inverted head and shoulders pattern.

The pair has moved to the strong pivot reverse point of the Murrey Math Lines. It is above the 38.2% Fibonacci Retracement level. Therefore, the pair will likely continue rising in the coming weeks. This bullish view will be confirmed if the pair moves above the resistance level at 0.8923.