Short Term Valuation Measures
Short-term valuation measures suggest the move may be stretched. Oil prices have slipped back below $90. Lower oil could lead to a more dovish reassessment of UK rate expectations. This may support a corrective rise in EUR/GBP towards 0.870 rather than a further move down to 0.860. The piece was produced using an AI tool and reviewed by an editor. FXStreet’s Insights Team selects market observations from external experts and adds input from internal and external analysts. Looking back to the spring of 2024, we saw EUR/GBP weaken significantly amid the tensions in the Middle East, falling roughly 1.5%. This move was largely driven by a more aggressive Bank of England rate profile compared to the European Central Bank, which proceeded with a rate cut in June 2024 while the BoE held firm at 5.25%. The resilience in equity markets at the time also favored the higher-yielding pound over the euro.Risk Managed Upside Approaches
At that point, with oil prices retreating below $90 a barrel, there was a view that the pair was oversold and due for a corrective bounce toward 0.870. However, that substantial correction failed to materialize throughout 2024 as fundamental policy divergence remained the dominant theme. The cross-rate instead continued to grind lower, even breaking below the 0.8400 level later that year. Given this history, derivative traders should be wary of positioning for a simple snap-back rally in the coming weeks. The key lesson from the past two years is that central bank policy divergence is the primary driver for this pair, often overpowering short-term technical signals. We believe that buying options to protect against further downside, such as purchasing puts, is a more prudent strategy than betting on a sustained rebound. For those still anticipating some upside, a bullish call spread could be a disciplined approach to consider. This would cap potential profits but significantly lower the initial premium paid, a valuable lesson for a pair that has consistently failed to sustain major rallies. This strategy allows for participation in a modest recovery while managing risk in case the long-term downtrend reasserts itself. Create your live VT Markets account and start trading now.
Start trading now – Click here to create your real VT Markets account
