EUR / GBP likely to be volatile as BOE-ECB risks grow
Key talking points:
- EUR / GBP ffinds support as traders prepare for ECB and BOE meetings
- The GBP’s hawkish expectations give way to disappointment
EUR / GBP continues to trade on a downtrend, with the pound remaining supported by expectations that the Bank of England will need to step up efforts to reduce monetary stimulus at its meeting next week. The pair has struggled over the past month, losing nearly 3% since hitting a new two-month high on September 29.e. It appears that buyers managed to find support around 0.8420 last week, but comments from BOE Governor Bailey on the need to act to contain inflation has only fueled the recent trend. bullish sterling.
EUR / GBP Daily graphic
BOE CONFIGURATION RISKS DECADE FOR GBP TRADERS
However, the biggest risk for the GBP ahead of next week’s meeting is the risk of disappointment. Markets are anticipating a more than 60% chance of a 15 basis point rate hike at the November meeting, with an additional 10 basis points for December. It’s hard to see the Bank living up to those hawkish expectations, let alone a rate hike next week, which means the pound could pay the price, sparking a spate of selling.
But not only the risk of under-issuing a negative call for the pound sterling, the flip side does not necessarily offer a very optimistic outlook. If the BoE were to hike rates next week, some economists believe it would have a negative impact on the economy at a time when growth is struggling to take off given recent supply and demand constraints. So the initial reaction may be bullish for the British Pound, as the markets see it as a signal of underlying economic strength, but the risk of a policy error is likely to weigh on the British Pound thereafter.
This means that overall the outlook for the British Pound heading into this meeting is not very attractive and we could see EUR / GBP trading become volatile as it approaches. Realistically, the best-case scenario for the British pound is for the BoE not to raise rates at this meeting, but continue to support the outlook for the economy and the possibility of raising rates at subsequent meetings, which would likely have short-term effects. sell, but would offer the most sustainable move in the long run.
THE ECB’S DOVISHNESS SHOULD CONTINUE
Even before the BoE meeting next week, we have the European Central Bank meeting on Thursday. Expectations are much less hawkish for this one given that the ECB is one of the most accommodating banks in Europe, with markets setting rates at rates unchanged roughly until the end of 2022.
We’ve seen Lagarde pay more attention to inflation in recent weeks, but if anyone wants to avoid a policy error, it will be the ECB, despite the out-of-control inflation in some member countries like Germany. Overall, excluding volatile food and energy prices, the underlying euro area CPI currently stands at 1.9%, which is below the 2% threshold set by the bank, which gives it enough leeway to continue supporting the economy as it wishes.
It is likely that Lagarde is avoiding giving too much away when it comes to the discussion of reducing speed at tomorrow’s meeting and therefore the euro could continue to lag behind.
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— Written by Daniela Sabin Hathorn, Market Analyst
Follow Daniela on Twitter @HathornSabin