December 8, 2008
EUR/GBP hit a record high of 0.8740 today. The currency pair has been on a tear, which is not much of a surprise given the Bank of England’s aggressive interest rate cuts. The European Central Bank has not even cut rates by half of the amount that the Bank of England has cut since the beginning of the year - the ECB has eased by only 150bp while the BoE has cut by 325bp.
EUR/GBP is in the “buy zone,” according to our Bollinger Bands and there is no technical resistance until the psychological level of 90 cents.
Interest rates are behind the move in EUR/GBP as the spread between 3 month euro rates and 3 month UK rates go from negative to positive territory (see the tight correlation in the chart below).
If you believe like I do that the ECB will continue to cut interest rates less aggressively than the BoE and that the “spread” between EZ and UK rates will remain positive in the Euro’s favor, then EUR/GBP should headed to 90 cents.