EUR/GBP hitting to a key support area, opens 0.8530 if broken

• EUR/GBP headed to a break of 0.8697?
• EUR/GBP lower on fundamentals.

EUR/GBP has been hit hard again to the downside with bears rejoicing in the UK fundamentals that are driving these conditions in the cross at the moment ahead of the ECB this week and BoE's Feb meeting. 

However, the EZ is also performing well and much will depend on the outcome of the ECB this week when markets listen to Draghi's presser for signs of hawkishness. Currently, EUR/GBP is trading at 0.8723, down -0.68% on the day, having posted a daily high at 0.8790 and low at 0.8700.

GBP/USD has breached the 1,42 handle in a spectacular blue skies rally on the charts from the vicinity of 1.3920 in yesterday's business while the euro rallied in a similar fashion from the 1.2220's to show its face on the 1,24 handle earlier today. This all comes in the wake of the dollar trading at fresh three year lows.

BoE vs ECB and Brexit is a driving force

However, fundamentally, the broader tone is dominating and today's UK data was outstanding, cementing the case for BoE rate hike expectations. The UK employment data, ex-bonus wages, arrived 102K for the quarter vs -13k Reuters poll forecasted. EUR/GBP was slammed down to 0.8750 for the lowest level since Dec 8) after this jobs data.

However, the euro is almost keeping up with equally impressive gains vs the greenback this week running up to a three year high. A correction might be in store and the pound keeps the edge on the back of data releases and the prospects over the ECB in terms of a rate hike. In other words, momentum signals are bullish however they are not yet confirming the fresh highs in spot, delivering negative divergence. 

From the EZ, we had the EU Markit services PMI resulted at 57.6, an over a decade high and above market's expectations, lifting the Composite index to 58.6. The ZEW servey was equally as impressive yesterday, underpinning the upside vs the greenback.

The downside in the cross comes also in a gradual repricing of Brexit risk premium, according to Chief Analyst, Jakob Ekholdt Christensen at Danske Bank:

“We remain bullish on GBP over the medium term, targeting 0.85 in 12M but stress that risks are that a break lower in the cross could come sooner than our forecast indicates and that the cross might break considerably lower.”

EUR/GBP levels

Analysts at Commerzbank explained that EUR/GBP remains under pressure following its recent failure to clear an old Fibonacci retracement at 0.8925.

"Note that we are also trading below the 55-week ma at 0.8778. The cross recently sold off to the 61.8% retracement of the move seen this year at 0.8697. A close below here targets the 0.8530/78.6% retracement of the move seen this year."