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Euro Forecast: EUR/USD Soars on ECB Pivot, EUR/GBP Reversal as ECB Out-Hawks BoE

EUR Analysis and News:

  • ECB Pivot Catapults Euro Higher
  • BoE Hawkish Decision Tempered by Dovish Bailey
  • ECB Out-Hawks BoE as EUR/GBP Reverses

ECB Recap

ECB President Lagarde delivered arguably her most hawkish press conference. In light of Eurozone inflation hitting a record high of 5.1% , the ECB President stated that inflation surprises caused a unanimous concern on the governing council.

The most notable part of Lagarde press conference had been what was not said, by not reiterating that an interest rate increase in 2022 is unlikely, which is in stark contrast and a significant shift from what was said by the ECB President six weeks ago. Markets have aggressively repriced tightening from the ECB, with the deposit rate seen exiting NIRP by the end of the year. Lagarde’s hawkish comments were later confirmed by ECB sources, where the talk is that net asset purchases may end in Q3, opening the door to a Q4 hike.

Subsequently, the Euro remains on the front foot across the board and for EUR/USD, the challenge is now at 1.1480-85, marking the prior YTD highs. Meanwhile, support sits at 1.1380-85. For now, in light of the ECB pivot, downside risks in the currency have diminished substantially.

EUR/USD Chart: Daily Time Frame

Euro Forecast: EUR/USD Soars on ECB Pivot, EUR/GBP Reversal as ECB Out-Hawks BoE

BoE recap

Yesterday, the Bank of England delivered a 25bps rate rise to 0.5%, as widely expected. The surprise came from the fact that there was a vote split on a large hike, with four members voting in favour of a 50bps hike. In turn, with the Bank suggesting that further rate hikes could be needed, money markets are now pricing in a 25bps hike in each of their next four meetings. However, while the decision itself was a hawkish surprise, Governor Bailey’s press conference had been somewhat on the dovish side, in which the message seemed to be frontload with hikes now, then stop and reassess.

Governor Bailey comments:

  • Should not assume rates are on a long march upwards.
  • We have not raised rates because economy is roaring away, this is not a standard demand driven rise in the Bank rate.
  • We are facing a squeeze on real incomes this year.
  • Would not be surprising if we see a further rate hike, but please do not get carried away.

Interestingly, within the MPR, the yield curve assumption used by the BoE, had been the Bank rate peaking at 1.4% in mid-2023, below current money market pricing. What’s more, their 3yr projected inflation rate is the lowest since 2011, providing another indication that the neutral rate will be below current pricing.

ECB Out-Hawks the BoE

Euro Forecast: EUR/USD Soars on ECB Pivot, EUR/GBP Reversal as ECB Out-Hawks BoE

Source: Refinitiv

ECB/GBP Snaps Higher as Policy Convergence Begins

The weekly close will be important to watch, as a close at current levels would mark a key weekly reversal. Over the past year it has been a typical theme for EUR/GBP to grind lower followed by a sharp move higher, rallies were sold amid the view of BoE/ECB policy divergence. However, now the Lagarde has opened to the door to possible rate hikes from the ECB, the view is now one of policy convergence and thus the bias to fade EUR/GBP rallies, may be over for now. Eyes on the 200DMA situated at 0.8514.

EUR/GBP Chart: Daily Time Frame

Euro Forecast: EUR/USD Soars on ECB Pivot, EUR/GBP Reversal as ECB Out-Hawks BoE

Source: Refinitiv