FX.co ★ Euro fired up with hawkish idea, pound leaves monetary distance

The euro and the pound have reversed roles. The pound is now depressed, the likelihood of a decline in the GBP/USD pair to the 1.3100 area by the end of the week is increasing. At the same time, euro bulls began to dream of a hawkish surprise from the European Central Bank.

The GBP/USD pair has been quoted at the lowest levels since December 2020. Positive news on Brexit and optimistic comments on the British vaccine failed to cheer up the pound bulls.

The local drug Sotrovimab has shown effectiveness in the fight against the new strain. As for the Brexit situation, as it became known, Britain is ready to offer France ways of reconciliation on the issue of fishing. We are talking about an additional agreement that will allow issuing more permits to EU courts.

But nothing is nice for the pound, as hopes for tightening policy by the Bank of England are crumbling. The number of people infected with Omicron is growing in the country. For example, 336 cases of the disease were registered on Monday, which is 90 more than the day before. It is unlikely that in the conditions of the deteriorating epidemiological situation, the central bank will decide on an earlier rate increase.

Most members of the central bank committee at a meeting on December 16 will decide that they need more time to assess the effects of the new strain. They will vote to keep rates at the historically low level of 0.1% for now.

As for the impact of Omicron on gross domestic product, according to most economists, it will be insignificant.

Another factor in the decline of the pound is the strong dollar and the Federal Reserve's desire to accelerate the reduction of incentives. The greenback still has chances for further recovery ahead of the release of inflation data. The CPI may have reached a new multi-year peak in November, exceeding 6.7%.

On the side of the dollar, the growth of dollar Libor rates on the interbank market. The rate has again updated the 7-month high, which means that bankers have no doubt that the US will quickly curtail the QE program and start raising the rate. It is worth noting that the same interest rates on loans in pounds have fallen. Financiers have stopped believing in a rate hike by the BoE.

Technical analysis is also against the pound. The pair's inability to move up reinforces bearish forecasts.

A pullback and a test of levels below 1.3200 will open the way for a fall to the next support near the 1.3125 area, then to 1.3100 and the 1.3050 area.

A steady rise above 1.3200 should trigger the closure of short positions on the pound and accelerate the recovery to the 1.3340 zone. Further along the course, the resistance is 1.3370 and 1.3400. The last level acts as a key barrier, its penetration will indicate that the GBP/USD pair has reached the bottom and turned up.

The euro has good and bad news, let's start with the bad. The latest report of the ZEW Institute - the index of the current situation in Germany - went into negative territory for the first time in six months. Reduced demand from abroad led to a much larger than expected drop in industrial orders in November. Difficulties with supplies have a negative impact on retail trade, among other things.

As a positive, we can highlight the slowdown in the pace of asset purchases by the ECB. Over the past week, the indicator increased by 12.9 billion euros against an increase of 14.7 billion a week earlier. In addition, the ECB has recently been suspected of preparing a surprise for the markets in the form of a rate hike. Why not, the ECB almost always follows the Fed.

The refusal at the next meeting to expand the quantitative easing program - APP, together with an increase in the CPI forecast, should support the EUR/USD pair. In this case, instead of the predicted strengthening of the downward trend, there will be an upward reversal of the quote.

The technical picture for EUR/USD is ambiguous, there is potential for further growth, but the sentiment is unstable, and it is not yet possible to assert the fact of a reversal with certainty. The euro has recovered above 1.1300, now we need to develop the upward leap.

Support is marked at 1.1265, 1.1220, 1.1185. Resistance - at 1.1310, 1.1345, 1.1380.