EUR GBP Still at Risk of New Lows Ahead of BoE

The EUR GBP exchange rate found a two-day rally last week around the European Central Bank’s rate meeting, but the pair was lower on Friday. The Bank of England will meet on Thursday to decide on interest rates and the market knows that the ECB are not going to act quickly enough on rates, while the BoE risks higher inflation if they do act.

The EUR v GBP is trading at 0.8349 ahead of the week where there is little economic data.

ECB may leave euro unsupported, ING says

European Central Bank President Christine Lagarde tried to play down the chances of a rate hike for 2022 last week, hinting that market players might be getting ahead of themselves.

But some analysts will feel that the ECB Chief is in denial about the inflation risks in the eurozone.

ING said ahead of the meeting:

“We think ECB President Lagarde will use all her diplomatic skills to moderate the diverging views of hawks and doves within the Governing Council on Thursday, and a neutral message may ultimately defy some of the market’s hawkish expectations.”

ECB chief economist Philip Lane also suggested recently that the ECB is not really satisfied with current market expectations about the first-rate hike.

The ECB are not accepting the reality that central banks such as the BoE and Australian RBA are having to reassess their own plans and follow more hawkish banks like that of Canada, and New Zealand.

The eurozone inflation reports are not as heated as others, but Germany reported 4.5% inflation on the same day as the ECB meeting and that was higher than expectations.

Bank of England will determine the outlook for the gbp v eur

This week will see the much-anticipated interest rate meeting from the BoE and that will define the near-term path for the pound sterling.

ING said of the meeting:

“We don’t expect policymakers to ‘do a Bank of Canada’ this Thursday and end its current quantitative easing (QE) program early. Some of the hawks had been voting for exactly this over recent months, but the current scheme is slated to end in December anyway.”

ING were also a little bearish for sterling, saying, “With a 15bp hike now fully-priced for the 4 November BoE meeting, we suspect that any concern over voting patterns plus some mild rate protest from the BoE through its 2-3 year CPI forecast could prompt a modest correction in GBP.”

Energy prices have reversed some of the recent panic move, while the latest inflation report was slightly lower than market expectations. That could prompt the BoE to pull back on aggressive hikes now that the market has readjusted its own expectations.

However, the OBR urged the bank to act this week warning of a move to 5% inflation in the UK. The OBR revised its latest report higher in light of the recent news from an average of 4% over 2022.

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