EUR/GBP: Bearish Outlook Driven by Weak Eurozone Fundamentals and GBP Resilience

Introduction

The EUR/GBP pair has been under notable pressure recently as macroeconomic data, investor sentiment, and technical signals align to suggest continued downside risks for the pair. In this detailed analysis, we will explore the fundamental drivers, sentiment positioning, and technical outlook for EUR/GBP, drawing a comprehensive picture for traders and investors.

Fundamental Analysis

Economic Growth (GDP)

• Eurozone: The Eurozone is showing sluggish economic expansion, with GDP growth at 0.4% and annual growth at 0.9%. The bloc faces stagnation in manufacturing and services sectors, limiting growth prospects.
• United Kingdom: The UK economy remains slightly more resilient, with GDP growth at 0.1% and annual growth at 1%. Despite stagnation, this marginal outperformance relative to the Eurozone gives the GBP a fundamental edge.

Inflation and Monetary Policy

• Eurozone: Inflation has softened to 2.3% YoY, accompanied by a -0.3% MoM decline, indicating waning price pressures. This reduction increases the likelihood of dovish ECB action, with rate cuts anticipated in 2025 to spur growth.
• United Kingdom: The UK inflation rate remains firm at 2.3% YoY with a 0.6% MoM rise, suggesting persistent price pressures. The Bank of England (BoE) is maintaining its hawkish stance, with interest rates at 4.75% to control inflation.

Labour Market

• Eurozone: The unemployment rate stands at 6.3%, reflecting stability but remaining elevated compared to the UK.
• United Kingdom: The UK unemployment rate is lower at 4.3%, indicating a tighter labour market, which supports domestic demand and strengthens the case for GBP resilience.

Trade Balance and Fiscal Health

• Eurozone: The Eurozone maintains a trade surplus of €6.8 billion, supported by robust exports. However, structural growth concerns weigh on long-term prospects.
• United Kingdom: The UK faces a trade deficit of £3.7 billion, which is a structural weakness but has not significantly offset GBP support due to stronger monetary policy expectations.

Summary: Fundamentally, the UK maintains an edge over the Eurozone due to higher inflation, a hawkish BoE, and relative economic stability. The ECB’s dovish stance and growth stagnation tilt the balance in favour of GBP.

Sentiment Analysis

Market Positioning

• Retail trader sentiment shows that approximately 59% of traders are long on EUR/GBP, while 41% are short. This bullish bias among retail traders often acts as a contrarian indicator, suggesting that EUR/GBP could face further declines.

Institutional Outlook

• Commitments of Traders (COT) reports reflect reduced net-long positions in EUR, signalling weaker institutional confidence in the Euro. In contrast, GBP maintains relative stability with positioning reflecting optimism driven by monetary policy expectations.

Geopolitical Sentiment

• Uncertainty in the Eurozone, particularly political risks in France and Germany, continues to weigh on the Euro. Meanwhile, the UK’s domestic economic policy appears stable, bolstering sentiment toward GBP.

Summary: Sentiment remains bearish for EUR/GBP, with retail and institutional traders favouring GBP amid Eurozone political and economic challenges.

Technical Analysis

Ichimoku Cloud

• Bearish Signals: Price is firmly below the Kumo (cloud), with all Ichimoku components – Conversion Line, Base Line, and Lagging Span – confirming a strong bearish trend.
• Future Outlook: The future cloud remains bearish, suggesting the downward momentum is likely to persist unless price decisively reverses.

RSI (Relative Strength Index)

• The RSI is at 36.04, indicating bearish momentum. While not yet oversold (below 30), it signals further room for downside movement.

MACD (Moving Average Convergence Divergence)

• The MACD line is below the signal line, with a declining histogram, confirming sustained bearish momentum.

Support and Resistance Levels

• Support:
  • Immediate support lies at 0.8200.
  • A break below this level could see further declines toward the significant psychological level of 0.8000.
• Resistance:
  • First resistance lies at the Base Line (0.86018), followed by Leading Span A at 0.85182.
  • A move above these levels would challenge the bearish outlook but remains unlikely given the prevailing signals.

Summary: Technical indicators paint a clearly bearish picture, with Ichimoku, RSI, and MACD all signalling downward pressure. Key support at 0.8200 remains critical for the short term.

Conclusion

EUR/GBP continues to face downside risks, driven by:

1. Fundamentals: Stronger UK economic resilience, tighter BoE monetary policy, and weakening Eurozone growth.
2. Sentiment: Bearish institutional positioning and political uncertainty in the Eurozone further weigh on the Euro.
3. Technical Signals: Bearish Ichimoku Cloud, weak RSI, and MACD confirm downward pressure, with critical support near 0.8200.

Outlook: Bearish for EUR/GBP
Traders should watch for further downside, with opportunities for short positions targeting 0.8200 and possibly 0.8000. Pullbacks toward resistance near 0.8600 may provide selling opportunities.

Unlock your full potential with our expert-led trading courses. Gain insights, learn winning strategies, and take control of your trading journey today.