Euro Falls Against Pound: Policy Divergence Create Trading Opportunities

A look at the monetary policy of the Eurozone?

A look at the monetary policy of Britain?

How can we benefit from the difference in monetary policy, and how does the chart illustrate it!

The EUR/GBP pair declined by approximately 4.23% at the start of 2024, reaching a level of 0.83330, which marks its lowest point since April 2022. Will this pair see further declines?
A look at the monetary policy of the Eurozone
In the September central bank meetings, the European Central Bank (ECB) cut interest rates by 25 basis points, and annual inflation dropped to 1.8%. The ECB is expected to continue its easing policy with further interest rate cuts of 25 basis points each in the upcoming November and December meetings. Typically, rate cuts are seen as negative for a currency, according to analysts.

A look at the monetary policy of Britain?

On the other hand, the Bank of England (BOE) kept its interest rates steady at 5% in its latest meeting, marking the second consecutive hold, as it remains focused on reducing inflation to 2%. This decision to maintain rates has positively impacted the performance of the British pound, according to analysts.

How can we benefit from these decisions?

With the ECB pursuing an easing policy and the BOE maintaining a tightening stance, there is now as policy divergence, when central banks follow opposing monetary policies, it presents an opportunity to focus on selling the euro and buying the pound, in this example as per analyst point of view. However, it's important to note that market movements are not guaranteed, and other factors such as geopolitical events, economic data, and investor sentiment can also influence currency prices. Therefore, a cautious and well-rounded approach is always recommended.
 

Figure 1: EURGBP H4 Chart, Tradingview

The chart for the EUR/GBP pair highlights this inverse relationship. As seen in the chart, the euro has been steadily declining against the pound, forming consecutive lower lows. The negative trend on the medium-term four-hour chart will only change if the pair registers a higher peak above the 0.83865 level. For now, the trend remains negative, and any rise to the 0.83703 level could be seen as an opportunity to continue the downward trend.