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EUR to GBP Exchange Rate Hits 5-Week Lows on Risk Appetite with More Downside Potential

I pointed out critical support levels on EURGBP last week. However, it would seem that sellers have overpowered buyers. The EUR to GBP exchange rate is currently trading below support at the 200 SMA on both the weekly and daily time frames. As of this writing, the currency pair is in the red by over 10 pips and is down close to 30 pips from its intraday high as it trades just above the 0.8700 handle.

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What has driven the EUR to GBP exchange rate lower? The first is market sentiment. Investors seem to be in a risk-on mode with the S&P 500, Nasdaq, Dow Jones, and Nikkei 225 trading in the green. Hopes that the worst is over for the coronavirus pandemic has driven risk appetite up. This has a bearish effect on the EUR to GBP exchange rate because the pound (through the BOE) has a higher interest rate at 0.10% than the euro at 0.00%. Higher-yielding currencies tend to benefit from risk appetite than lower-yielding ones do.

Secondly, investors may also be drawn to the pound following news of UK Prime Minister Boris Johnson’s recovery from the coronavirus. Last week, it was reported that the UK’s head of state was admitted to the intensive care unit when he got infected. This development effectively diminishes the political uncertainty posed by the possibility of someone else taking over his position.

A closer look at the 1-hour time frame also suggests that the downward trajectory on the currency pair is likely to continue. This is because a downward channel becomes apparent when you connect the recent highs and lows on EURGBP. Near-term resistance on the currency pair is 0.8740 where the top of the channel is. On the other hand, if buyers continue to dominate the next few trading days, support is around 0.8665 where the bottom of the channel is.