EUR/GBP waiting for the Old Lady
After the excitement and subsequent fireworks surrounding the Fed’s dot plot last week, it’s the turn of the Bank of England to update us on their policy outlook and where the UK sits in the global rate hike queue.
With no updated forecasts until the next meeting in August, the MPC is more likely to stand pat and not shift current market expectations.
The last set of forecasts in May backed the market’s view at the time of just less than a quarter point hike in rates by the middle of 2023. With the economy now humming along and data robust, the first 15 point increase is now priced in by August next year.
With the Bank’s outlook currently already optimistic on the UK’s growth prospects and inflation expected to peak out around 2.5% later this year, there is still some uncertainty around the delta variant and the delayed 19 July “grand reopening”. This means the MPC is likely to wait for its new economic projections released at its August meeting. Remember too that policymakers said in May that they did not intend to tighten until they see “clear evidence” of a rebound.
EUR/GBP drifting lower
After being trapped in a narrow range for several weeks, EUR/GBP has moved back below 0.86 due to recent higher-than-anticipated inflation and the Fed’s hawkish shift. With the BoE more advanced in policy normalisation than the ECB, the long-term downtrend should remain intact with the 100-day simple moving average acting as resistance above at 0.8629. A Fib retracement level (23.6%) at 0.8651 lies above here which has also capped the recent upside.
Near-term support lies at last week’s low at 0.8542 before the cycle low at 0.8472 comes into view. EU/UK Brexit tensions remain a risk with the implementation of the Northern Ireland protocol a near-term issue now the grace period is expiring, though a compromise solution should inevitably be reached.